Citi launches treasury bills-linked home loans
Mumbai: Citi India on Monday launched a home loan product linked to 3-month treasury bills, the first of its kind to be offered by a bank in the country.
Even as the product will allow pricing of home loans using an external and independent benchmark, linking the product to T-bills is likely to help the foreign lender to take advantage of hardening interest rate cycle.
Home loans for customers, who opt for the new product, will be priced based on the 3-month T-bill rate published on 12th of each month by Financial Benchmarks India Pvt. Ltd, an entity jointly owned by Fixed Income Money Market and Derivatives Association of India, Foreign Exchange Dealers’ Association of India and India Banks’ Association. While the interest rate will vary across customers depending on their credit profile and loan requirements, the spread is likely to be 200 basis points above the 3-month T-bill rate, said Rohit Ranjan, managing director, head—secured lending. One basis point is a hundredth of a percentage point. On 5 March, 3-month T-bill rate stood at 6.27%.
With the launch of the product Citi will be testing waters with respect to pricing of its loan products using an external benchmark in India which it has already been doing in other global markets like in Singapore, Taiwan and the US among others.
To be sure, the Reserve Bank of India (RBI) has been mooting an external benchmark for better monetary policy transmission. In October 2017, a committee set up by the central bank recommended linking bank lending rates to a market benchmark in a bid to hasten monetary policy transmission as well as to improve transparency in rate setting by lenders.
The panel—headed by Janak Raj, principal adviser, monetary policy department—recommended that all floating rate loans advanced from 1 April be referenced to one of the three external benchmarks. The panel has suggested a risk-free curve involving rates on treasury bills, or certificates of deposit rates or the central bank’s policy repo rate. The panel, however, also stated the drawbacks of using T-bills as the benchmark due to its excessive sensitivity to changes in fiscal policies and susceptibility to global spillover in the aftermath of sovereign debt crisis.
On being asked why the lender has chosen to link the home loan product to a shorter duration paper, Shinjini Kumar, country business manager, global consumer banking at Citi India said, “We feel it is extremely reflective of RBI’s policy rate and liquidity conditions in the market. The spread for a customer will remain constant throughout the life of the loan,” said Badrinivas NC, managing director, country treasurer and head –local markets treasury at Citi India. The product will allow the bank to review the rates on a monthly basis.
Citi’s home loan book as on 31 December 2017 stood at Rs9,000 crore and its home loans under marginal cost of funds based lending rate (MCLR) regime are linked to 3-month MCLR and are reviewed every three months.
Its net advances for the same period stood at Rs57,000 crore. The average home loan ticket size for Citi in India is around Rs1 crore, Ranjan said.
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