This Is Why Home Loans Will Become More Transparent From 2019

Home loan borrowers rejoice. The Reserve Bank of India (RBI) on December 5 in its fifth bi-monthly policy meet proposed that floating rate home loans will now be benchmarked against an external benchmark from April 1, 2019.

The move is expected to enhance the transparency for the home loan customers. Under the proposal, RBI has suggested the use of external benchmarks such as the repo rate, 91-day Treasury bill yield or the 182-day Treasury bill yield produced by Financial Benchmarks India (FBIL), Money Control reported. The RBI has also reportedly allowed banks to choose any other benchmark market interest rate produced by FBIL.

It has been a perennial complaint from the home loan borrowers that banks were quick to raise the rate of interest when the rates in the economy were going up but were slow to reduce the rate of interest on home loans. Also, the banks have different methods to fix the loan rates and how they were to move over time, in line with rising and falling rates in the economy, such as prime lending rate, bank prime lending rate (BPLR) and the marginal cost of lending rate (MCLR) in the past.

All these benchmarks were usually internal information of the banks and as per experts, these were neither pro-actively passed on the benefits to the customers. Financial experts also believe that although a home loan is the largest loan most individuals ever take in their lifetime, they rarely spend the time to understand how their home loans work. Not all customers shifted from BPLR to MCLR system quickly, which was better than the previous arrangements due to want of understanding of the home loan products.

In simpler words, putting an end to the confusion of multiple benchmarks, the RBI proposal has made it clear that the banks cannot offer multiple benchmarks for their loan products in one category going forward. Existing loans based on PLR, BPLR, and MCLR will soon become history and home loan products will be standardized so that customers will find it easy to understand the products and pick one that suits their needs.

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