Pressure on banks to pass on benefits of ower rates to existing borrowers who have opted for floating home loan rates may come from a new quarter. An arm of the Reserve Bank of India (RBI), which gets banks to set minimum standards of service, will now ask banks to spell out how interest rates are calculated on floating rate loans.

The Banking Codes and Standards Board of India (BCSBI) chalks out a list of banking services and asks banks to spell out the minimum level of service their customers should expect. Although the BCSBI does not have regulatory powers, it does monitor services offered by banks and point out irregularities to the RBI. Speaking to ET, KJ Udeshi, chairperson of the BCSBI, said: "We plan to review the code to bring about transparency in pricing of loans, especially the retail products."

In principle, borrowers who have availed of floating rate loans should see their interest liability reflecting the rates prevailing in the market. In practice, a new borrower who avails of a floating rate loan invariably gets a cheaper rate than an existing borrower. Banks have been able to get away with this by varying the spread between their loan rates and benchmark prime lending rate (PLR). For instance, if a bank with a PLR of 12% extended home loans at 11% (PLR minus 100 bps) a few months ago, it can now entice new borrowers with better rates of 10.5% by offering rates at PLR minus 150 basis points. In this case, since the PLR is unchanged, the old borrower who took the loan at 11% will continue to pay 11% even though rates have fallen to 10.5% for new borrowers.

Source: Economic Times RBI Arm To Fix Floating Home Loan Rate Anomaly