NTH :: RBI directs banks to display all loan costs


TNN | Jan 23, 2015, 02.32AM IST | Times of India
The significance of this fact sheet is that it will make it possible for borrowers to compare loans from two lenders. Also, by making the charges a part of the contract, the central bank has reduced leeway for lenders to vary pre-payment charges subsequently.
NTH
MUMBAI: Borrowers availing home, auto and personal loans can now be assured of a fair deal with the Reserve Bank of India (RBI) making it compulsory for banks to set out every possible cost in respect of the loan in a fact sheet at the processing stage. Banks will also have to publish the ‘annual percentage rate’ representing the total cost of credit to an individual borrower. Besides, they will have to display on their website the interest rate range for various contracted loans for the past quarter for different categories of advances.

The fact sheet drafted by the central bank requires lenders to spell out the interest rate, the spread above the benchmark rate, date of reset of floating rates, mode of communication of interest rate changes, all fees payable, refundable fees, charges for conversion from floating to fixed rate loan and penalty for delayed payments.

The significance of this fact sheet is that it will make it possible for borrowers to compare loans from two lenders. Also, by making the charges a part of the contract, the central bank has reduced leeway for lenders to vary pre-payment charges subsequently.

Today, an objective comparison is difficult because terms differ vastly. For instance, some of the personal loans have deleterious charges for pre-payment in the first year. Asking banks to disclose an annual percentage rate representing the total cost of credit ensures that customers are not taken in by deceptively low rates with a step-up structure. At the same time, it does not take away the ability of banks to innovate in product design.

The new norms on transparency follow the central bank’s revised guidelines for calculating the benchmark base rate to ensure that changes in interest rates are passed on to all borrowers fairly. The new norms are based on recommendations by a working group on cost of the pricing of credit. The committee – which had submitted its report a few months ago – had said that despite efforts via policy to usher in transparency and fairness to the credit-pricing framework, there have been certain concerns from the customer service perspective. These mainly relate to the downward stickiness of the interest rates, discriminatory treatment of old borrowers vis-a-vis new borrowers, and arbitrary changes in spreads.

One of the major recommendations by the committee was that the Indian Banks’ Association should develop a new benchmark for floating interest rate products, namely, the Indian Banks’ Base Rate, or IBBR. It had also proposed a penalty for banks that refuse or delay transfer of loan for refinance. RBI is yet to take a stand on these two recommendations.

Source : http://goo.gl/8acJlp

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