Photo: iStock
Photo: iStock

Should NBFCs also use external benchmarks for home loan rates?

From April 2019, banks will need to benchmark new floating rate retail loans to an external benchmark. Since close to half of loans are given by NBFCs and HFCs, should they use an external benchmark too?

Won’t work for both banks and NBFCs

An HFC raises funds from various sources and incurs certain cost on the borrowed funds. This cost depends on market rates, among other factors. For instance, the recent liquidity crisis pushed the cost of borrowing by 1-1.50% with no change in market factors. External benchmarks like RBI repo rate, 91- or 182-day treasury bill or G-secs often do not move with the market. Hence, if interest rate is linked with benchmarks, it may result in unpredictable loss or gain to HFCs and irrationally higher or lower cost for borrowers. HFCs can overcome this problem by extending fixed rate loans with sufficient spread over external benchmarks but that will defeat the purpose of interest transmission to retail customers which happens with floating rates. The present system of MCLR for banks and internal benchmark for HFCs is much better as competitive environment ensures fairness.

—Deo Shankar Tripathi, managing director & CEO, Aadhar Housing Finance

NBFCs will mimic bank loan rates

RBI’s recent announcement to link bank floating rates to external benchmarks is in line with global best practices and would definitely lead to higher transparency in pricing loan products. Also, MCLRs are not very sensitive to policy rate changes. External benchmarks, especially repo rate, will address this problem.

If the new format makes policy transmission more efficient, the prompt changes in bank lending rates would automatically manifest through fluctuations in net interest margins of NBFCs and HFCs, and in a competitive environment the latter’s lending rates would mimic that of banks. However, NBFCs and HFCs could also adopt such a framework, provided they are able to raise funds at rates linked to such external benchmarks.

—Khushru Jijina, managing director, Piramal Capital & Housing Finance

Benchmark rules should be uniform

We are awaiting final guidelines from RBI on this matter. What we understand is that the rate needs to be linked to an external benchmark as specified by RBI and the spread over the benchmark rate (as decided by the bank) should remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change. In the short term, it may not impact rates much, but depending on how RBI recommends banks revise rates, it will impact how often rate changes are passed on to the customer.

HFCs and NBFCs are significant players in home loan and micro loans segments. It would be in the interest of the customer that regulation with regard to the benchmark rate and treatment be uniformly applied.

—Rajiv Anand, executive director (retail banking), Axis Bank

Move will create level-playing field

RBI’s proposal that banks link all new floating rate retail and MSME loans to external benchmarks is forward looking and will improve transparency. Once floating rates are linked to an external benchmark, borrowers will be aware of interest costs and won’t have to rely on banks’ internal confidential calculations.

Although it will be a new paradigm for NBFCs and HFCs, in the interest of transparency and unambiguity for consumers, external benchmarking should indeed be extended to NBFCs and HFCs. Such an extension will ensure a standardised and level-playing field across the full spectrum of the retail lending landscape.

RBI should do away with operational nightmares by prescribing unrestrained execution rules for all these loans. From a consumer perspective, an inconvenient consequence would be complicated and frequent reset of EMIs.

—Raj Khosla, founder and managing director, MyMoneyMantra

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