Home loans need a more sta­ble bench­mark

Fol­low­ing the RBI-ap­pointed com­mit­tee’s sug­ges­tions can help solve the chronic prob­lems of In­dia’s house­hold fi­nance

Business Standard - - FRONT PAGE - SAN­JAY KUMAR SINGH

Fol­low­ing the RBI-ap­pointed com­mit­tee’s sug­ges­tions can help solve the chronic prob­lems of In­dia’s house­hold fi­nance.


Have you ever tried shop­ping for a home loan? Chances are that you would be to­tally con­fused. While the ba­sic bench­mark, the mar­ginal cost of funds­based lend­ing rate (MCLR) stays the same, most banks use dif­fer­ent tenures to cal­cu­late the rate. Some, like State Bank of In­dia and Pun­jab Na­tional Bank use one-year MCLR while oth­ers like HSBC and Citibank use 3-month as bench­mark. And some like ICICI Bank use two bench­marks — 6-month and one year MCLR. Then, there are dif­fer­ent of­fers that give some 10 ba­sis point ben­e­fit for women and so on.

Against this back­drop, the Re­serve Bank of In­dia (RBI)ap­pointed House­hold Fi­nance Com­mit­tee, headed by Tarun Ra­mado­rai, has pro­duced a re­port that of­fers a com­pre­hen­sive set of sug­ges­tions on how the par­tic­i­pa­tion of In­dian house­holds in for­mal fi­nan­cial mar­kets can be en­hanced. And, one of its main tar­gets is the home loan sec­tor. Link home loans to repo rate: Since April 1, 2016, the bench­mark used for deter­min­ing the home loan rate has been the mar­ginal cost of funds based lend­ing rate (MCLR). De­spite the switch from base rate to the MCLR regime, the home loan rate does not de­cline rapidly when in­ter­est rates within the econ­omy are fall­ing. One rea­son is that the home loan rate is linked to the MCLR, which is con­trolled by banks. The com­mit­tee has sug­gested that it should be bench­marked to the repo rate, a well-known and widely-pub­li­cised rate. Ex­perts dis­agree on the finer points of this sug­ges­tion. Says Manoj Nag­pal, chief ex­ec­u­tive of­fi­cer (CEO), Out­look Asia Cap­i­tal, “If you do want to link the home loan rate to a more trans­par­ent bench­mark, it has to be a mar­ket-de­ter­mined rate, such as the 10-year GSec, and not an RBI-de­ter­mined rate.” He adds that the repo rate and mar­ket-based rates some­times move in op­po­site di­rec­tions.

Ac­cord­ing to Naveen Kukreja, CEO and co-founder, Pais­abazaar.com, the sug­ges­tion to make banks quote RBI’s repo rate in­stead of their own MCLR rates will def­i­nitely make loan rate com­par­i­son eas­ier for bor­row­ers. How­ever, he adds: “This may not help bor­row­ers to avail of re­duced rates as the ac­tual rate charged by banks de­pends on the bor­rower's pro­file, in­come, credit score and var­i­ous other fac­tors.”

The com­mit­tee has also sug­gested that the loan rate should re­set af­ter ev­ery one month to en­sure faster trans­mis­sion. “The bor­rower should be al­lowed to de­cide what he wants at the time of tak­ing the loan. If he wants a more sta­ble home loan rate, he should go to a bank like SBI which links its home loan to the oneyear MCLR. On the other hand, if he Un­der the cur­rent regime, the home loan rates of­banks are linked to var­i­ous MCLR tenures (%) Citibank HSBC ICICI Bank SBI PNB wants his home loan rate to change more of­ten, he should go to a bank that links it to the three-month MCLR. The one-year MCLR is a dis­ad­van­tage only when rates are go­ing down, not when rates are go­ing up,” says Nag­pal. Lack of trust in fi­nan­cial in­sti­tu­tions: The Com­mit­tee noted that the av­er­age In­dian house­hold holds 84 per cent of its wealth in real es­tate and other phys­i­cal goods, 11 per cent in gold and the resid­ual 5 per cent in fi­nan­cial as­sets such as de­posits and sav­ings ac­counts, pub­licly traded shares, mu­tual funds, life in­sur­ance and re­tire­ment ac­counts). In com­par­i­son, re­tire­ment as­sets ac­count for large shares of wealth in Aus­tralia (23 per cent) and the UK (25 per cent).

The lack of trust in fi­nan­cial in­sti­tu­tions partly ex­plains the ten­dency of house­holds to avoid fi­nan­cial prod­ucts and in­vest in phys­i­cal as­sets such as gold in­stead. “Peo­ple avoid fi­nan­cial as­sets such as mu­tual funds, stat­ing: ‘I feel it is too risky and I’ll even­tu­ally lose money,’ and ap­pear to view gold as a rel­a­tively safe as­set. How­ever, we note that the move to­wards gold may not solely be be­cause of the pull of gold, but also be­cause of a push away from other prod­ucts,” says the re­port.

Ac­cord­ing to ex­perts, the main prob­lem is that risks aren’t well ar­tic­u­lated by fi­nan­cial in­sti­tu­tions. The ba­sic in­vest­ment prod­uct is the fixed de­posit, but banks don’t re­ally ad­ver­tise them. So sev­eral per­cep­tions and myths ex­ist. And ram­pant

Right-based ap­proach to data pri­vacy: With the Aad­haar and pri­vacy de­bate at its peak, the com­mit­tee makes use­ful sug­ges­tions. In the course of their work, fi­nan­cial in­sti­tu­tions col­lect a vast amount of per­sonal and pri­vate data which gets mis­used some­times. The com­mit­tee says that In­dia should con­sider mov­ing from a con­sent-based ap­proach to a rights-based ap­proach. Cur­rently, all that in­sti­tu­tions have to do is get the cus­tomer to sign a con­sent agree­ment. Hav­ing ob­tained the con­sent, they are free to use the data in any man­ner they like. “In most such trans­ac­tions, one party has much greater bar­gain­ing power,” says Udb­hav Ti­wari, policy of­fi­cer at the Cen­tre for In­ter­net and So­ci­ety, Bengaluru. Hence, the client meekly signs the con­sent agree­ment. “A rights-based ap­proach to pri­vacy would mean that the right to data pri­vacy is not some­thing that a per­son can con­sent away,” says Ti­wari. While the in­sti­tu­tions that col­lect the data will be able to use it for spec­i­fied pur­poses, they could be held li­able if they use it for pur­poses deemed vi­ola­tive of the cus­tomer's right to pri­vacy. Elec­tronic Know Your Cus­tomer (e-KYC): The com­mit­tee has said that a ma­jor im­ped­i­ment to the wide­spread adop­tion of e-KYC is that there is un­cer­tainty in firms' in­ter­pre­ta­tion of reg­u­la­tory norms about elec­tronic ver­i­fi­ca­tion and set­tle­ment. This is due to opaque com­mu­ni­ca­tion be­tween firms and the reg­u­la­tor. Hence, firms are over cau­tious. For in­stance, even in cases where wet sig­na­tures are not re­quired, they en­force it on cus­tomers. Ac­cord­ing to ex­perts, an­other prob­lem with the cur­rent KYC regime is du­pli­ca­tion of ef­fort. “An in­ter­me­di­ary who reg­is­ters a com­pletely fresh in­vestor in mu­tual funds is cur­rently re­quired to reg­is­ter his de­tails with two KYC agen­cies– CERSAI and a KRA (KYC reg­is­tra­tion agency). This is mas­sive du­pli­ca­tion of ef­fort with no con­ceiv­able ben­e­fit,” says Kunal Ba­jaj, founder and CEO, Clear­funds.com.

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