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Home loans to be transparent, but at the cost of volatile rates | Livemint

Transparency journey
It has been a concern even earlier that loan pricing is not transparent and transmission to retail borrowers doesn’t happen completely. This also means that when interest rates go up, they don’t come down easily for loans, but deposit rates are sticky at lower levels, so when the rates increase deposits rates don’t increase proportionately.

A study done by Care Ratings Ltd, titled Impact of RBI’s Rate Change on Scheduled Commercial Banks’ Interest Rates, confirmed these experiences in August 2018. Other than the most recent policy announcements, in the previous instances, banks raised lending rates faster than they raised deposit rates. Worse, the study found that in four out of six instances, banks hiked deposit rates by a smaller margin than they raised lending rates. Then, there have been 11 instances in the past six years when RBI decreased interest rates. On five occasions, banks did not react in terms of transmitting interest rate benefit to borrowers. On two occasions, banks did not reduce base rates, but cut deposit rates (see graph).

Hence, there have been valid consumer complaints on this front. RBI’s latest measure is likely to improve transparency in transmission as well as pricing. As per the new rule, for which detailed guidelines are awaited, the new loans will be benchmarked directly against repo rate, or 91- or 182-day treasury bills yield or any other external benchmark or any benchmark market interest rate produced by FBIL. Banks will be allowed to charge a spread over the benchmark rate.

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Home loans to be transparent, but at the cost of volatile rates – Livemint.