New RBI rules may end loan spread tinkering; to standardise rate setting across banks, NBFCs
MUMBAI: Lenders may no longer be able to tinker with loan spreads over the benchmark rate to offer new borrowers better deals than existing customers. Draft RBI rules seeking to standardise interest-rate setting across banks, NBFCs and cooperatives require lenders to maintain the spread between the benchmark rate and the loan rate for at least three years.The proposed framework standardises interest calculation across lenders. Interest on advances will have to be charged on monthly rests, except for specified agricultural advances, and calculated on a daily reducing balance basis using the actual/actual day-count convention.
Smaller lenders will get exemptions from some of the requirements.
For floating-rate loans, the benchmark reset frequency for major lenders cannot exceed three months and must remain fixed for the tenor of the loan. The draft also sets common parameters for spread components and requires non-credit risk components to remain unchanged for three years.A credit risk premium can be changed only when there is a documented change in the borrower’s credit profile following a comprehensive review. Other components of the spread cannot be increased before three years from the first disbursement or the last revision. Lenders can reduce these components earlier for customer retention only on a non-discriminatory basis. Loans also cannot be priced below the applicable benchmark.For commercial banks, floating-rate personal loans and floating-rate loans to MSMEs will continue to be linked to an external benchmark. Banks can use the repo rate, treasury-bill yields, SORR or benchmarks published by FBIL.Internal benchmarks such as MCLR will have to follow a stricter methodology. MCLR must be based on a three-month moving average of the annualised weighted average cost of fresh domestic deposits and borrowings. The calculation must be system-generated and independently verifiable.For NBFCs, cooperative banks, RRBs and AIFIs, linking floating-rate loans to an external benchmark will remain optional. These lenders can link such loans to internal or external benchmarks.Smaller lenders will get exemptions from some of the requirements. RCBs with deposits of up to Rs 1,000 crore, Base Layer NBFCs and Tier 1 and Tier 2 UCBs will not have to comply with the three-month maximum reset frequency or the three-year freeze on revisions to non-credit risk components of spreads.The methodology used to calculate internal benchmarks will also have to be made publicly available. Loan agreements will have to specify the benchmark, reset periodicity and reset dates.
