Citi Launches India's 1st T-Bill Rate-Linked Home Loan
Banks have been united in their virulent criticism of a suggestion by the Reserve Bank of India (RBI) that loan rates be linked to external lending benchmark. In October last year, a panel set up by the RBI suggested banks linked their marginal cost of funds-based lending (MCLR) rates with either of the three external benchmarks ─ the treasury bill rate, the CD rate and the Reserve Bank’s policy repo rate ─ to ensure better transmission.
Making public the response it received from financial institutions on the suggestion, the banking regulator said banks were of the opinion that the existing MCLR system was working well, and it should continue.
"All banks, barring some foreign ones, are of the view that none of the three external benchmarks recommended by the study group can be adopted in the near- to medium-run, since banks’ funding cost is not related directly to any of the proposed external benchmarks,” the RBI said in an addendum recently.
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Now, one global bank has already taken the lead to set an example — a move that would help home loan borrowers significantly. US-based banking major Citi on March 5 launched India’s first market benchmark rate-linked lending product. The bank’s new home-loan product will be linked to the rate of treasury bills (T-bills), which is used by government for its short-term borrowings.
The bank, which had a gross home-loan book of Rs 9,000 crore as of December last year, already offers external benchmark-linked products in markets such as the US and Singapore. The bank’s overall India home-loan book stood at Rs 57,000 crore in the same period.
Here is what you need to know about the product:
*Loans will be sold at a fixed spread above the T-bill rate which will be maintained throughout the loan tenure.
*There will be a range of spread above the T-bill rate which the bank will follow. The average spread will be two percentage points.
*If you buy this product, you home loan rates will be reviewed every three months. India banks typically do that annually.
*The interest rate resets of the T-Bill-linked home loan are on March 1, June 1, September 1 and December 1.
*The three-month T-Bill rates are published by Financial Benchmarks India Pvt Ltd (FBIL), an RBI-recognised body, on 12th of each month. The bank will also publish the rates on its website every month.
*Old customers of the bank will also be able to enjoy the benefits offered by its new product. They will not have to pay any additional cost for making the switch.
With inputs from Housing News