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RBI mandates level playing field for old borrowers

Banks offering lower interest rates to new customers could become a thing of past, with the banking regulator asking lenders to “ensure price differentiation that is consistent with its credit pricing policy”. This means in case a bank changes the spread while keeping the base rate unchanged, both new and old customers will get the benefit of lower interest rates.

In the past few years, banks have been reducing the spread of retail loans for new customers while keeping the base rate unchanged. As a result, old customers continued paying higher interest rates, as the spread – the difference between the base rate and the actual interest charged – remained unchanged.

Base rate is the benchmark minimum to which all loan rates are linked.

EQUAL OPPORTUNITY
  • Spread on existing loans can be increased only if there is deterioration in the credit risk profile or change in tenor premium
     
  • Rationale for change in spread will be subjected to supervisory review
     
  • Banks can review base rate method after three years now instead of five years
     
  • Banks to review base rate at least once in a quarter

“Banks should have a board-approved policy delineating the components of spread charged to a customer. It should be ensured that any price differentiation is consistent with bank’s credit pricing policy,” the Reserve Bank of India (RBI) said on Monday.

The guidelines are applicable to banks only, not non-banking finance companies including housing finance companies, as base rate is only applicable to banks.

Banks have to adopt the new norms in a month.

The banking regulator further said that a bank’s internal pricing policy must spell out the rationale for, and range of, the spread in the case of a given category of borrower, as also the delegation of powers in respect of loan pricing. The rationale of the policy should be available for supervisory review.

The central bank has also mandated that the spread charged to an old borrower should not be increased except on account of deterioration in his or her credit-risk profile or a change in the tenor premium.

“Any such decision regarding change in spread on account of change in credit risk profile should be supported by a full-fledged risk profile review of the customer,” RBI said, adding that the change in tenor premium should not be borrower-specific or loan-class-specific.

In other words, the change in tenor premium will be uniform for all types of loans for a given residual tenor.

RBI has also offered freedom to banks to review the base rate calculation method once in three years, as compared with once in five years mandated earlier. The change in method should have the board’s approval.

Banks are required to review the base rate at least once in a quarter with the approval of its board or asset liability management committee. At present, the review of the base rate does not have a fixed schedule.

The revised norms are based on a committee headed by Anand Sinha, former deputy governor of RBI, set up to review credit pricing.

The direction comes soon after RBI cut repo rate (the rate at which RBI lends to banks) by 0.25 per cent, the first reduction in 20 months, to boost credit and economic growth.

Banks have in the past shown reluctance to pass on benefits of rate cut but have been proactive in raising benchmark lending rate soon after repo rate is raised.

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