- Measures suggested by RBI panel for transparent and appropriate pricing of credit under a floating rate regime.
- Indian Banks Base Rate (IBBR), a new yardstick for floating interest rate products to be developed by Indian Banks’ Association (IBA), collated and published by the IBA on a periodic basis.
- The board of a bank should ensure that any price differentiation is consistent with bank’s credit pricing policy factoring Risk Adjusted Return on Capital (RAROC) and demonstrate to the RBI the rationale of the pricing policy.
- Banks, whose weighted average maturity of deposits is on the lower side should move towards computing the Base Rate on the basis of marginal cost of funds.
- Banks’ internal policy define the rationale for, and range of, the spread in the case of a given borrower, as also, the delegation of powers in respect of loan pricing, the working group suggested.
- The floating rate loan covenant may have interest rate reset periodicity and the resets may be done on those dates only, irrespective of changes made to the Base Rate within the reset period.
- Sunset clause for Benchmark Prime Lending Rate contracts so that all the contracts thereafter are linked to the Base Rate.
- Reduction of benefit of interest on the principal on account of pre-payments should be given on the day the money is received by the bank without waiting for the next EMI cycle date to effect the credit.
- For retail loans, customers should have a choice of ‘with exit’ and ‘sans exit’ options at the time of entering the contract.
- This would help:
- Bring in transparency in pricing
- Reduced customer complaints
- Better transmission of changes in the policy rate
- Improved asset liability managements at banks.
Exams Perspective:
- Base Rate
- Benchmark Prime Lending Rate
- Risk Adjusted Return on Capital (RAROC)
- Sunset Clause