RBI asks banks to ensure credit incentives to micro and small enterprises

The Reserve Bank of India (RBI) has asked banks to take into account the incentives available to micro and small enterprises (MSEs) while pricing their loans.

MSE borrowers are eligible for incentives in the form of the credit guarantee cover of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and the zero risk weight for capital adequacy purpose for the portion of the loan guaranteed by the CGTMSE.

They are also eligible for differential interest rate compared to other borrowers. However, banks should note that such differential rates of interest should not be below the base rate of the bank, RBI said.

Further, RBI has advised banks to undertake a review of their loan policy governing extension of credit facilities to the MSE sector, with a view to using board approved credit scoring models in their evaluation of the loan proposals of MSE borrowers.

Pricing of loans
Meanwhile, a working group set up by the Reserve Bank of India, in its draft report on pricing of credit, has recommended that banks, particularly those whose weighted average maturity of deposits is on the lower side, move towards computing the base rate on the basis of marginal cost of funds.

This, according to RBI, would result in more transparency in pricing, reduced customer complaints, better transmission of changes in the policy rate and improved asset liability management at banks.

If banks use weighted average cost of funds because of their deposits profile or any other methodology that may result in differentiation between old and new customers, the boards of banks should ensure that this differentiation does not lead to any discrimination amongst borrowers, the group said in its report.

Apart from factors like specific operating cost, credit risk premium and tenor premium, broad factors, such as, competition, business strategy and customer relationship are also used to determine the spread.

RBI wants banks to have a board-approved policy to ensure that any price differentiation is consistent with bank's credit pricing policy factoring Risk Adjusted Return on Capital (RAROC). Banks should be able to demonstrate to the RBI the rationale of the pricing policy.

Banks' internal policy must spell out the rationale for, and range of, the spread in the case of a given borrower, as also, the delegation of powers in respect of loan pricing, the RBI report said.

The spread charged to an existing customer cannot be increased except on account of deterioration in the credit risk profile of the customer.

Also, RBI wants banks to inform the customer of this at the time of contract and also adequately display the information on banks through notices / web site.

The floating rate loan covenant may have interest rate reset periodicity and the resets may be done on those dates only, irrespective of changes made to the base rate within the reset period.

There may be a sunset clause for Benchmark Prime Lending Rate (BPLR) contracts so that all the contracts thereafter are linked to the Base Rate. Banks may ensure that these customers who shift from BPLR-linked loans to Base Rate loans are not charged any additional interest rate or any processing fee for such switch-over.

RBI report suggests that the IBA develop a new benchmark for floating interest rate products, namely, the Indian Banks Base Rate (IBBR), which may be collated and published by IBA on a periodic basis. Banks may consider offering floating rate products linked to the Base Rate, IBBR or any other floating rate benchmark ensuring that at the time of sanction, the lending rates should be equal to or above the Base Rate of bank.

To begin with, IBBR may be used for home loans. By design, the IBBR should meet the standards for benchmarks set by the RBI Committee on Financial Benchmarks headed by P Vijaya Bhaskar, executive director, RBI.

The working group has also made several recommendations to bring in greater transparency enabling comparability across banks and informed decision making by customers.

The benefit of interest reduction on the principal on account of pre-payments should be given on the day the money is received by the bank without waiting for the next EMI cycle date to effect the credit.

Both, banks and the Reserve Bank may impart financial education through consumer education drives.

For retail loans, the customers should have a choice of ''with exit'' and ''sans exit'' options at the time of entering the contract.

The exit option can be priced differentially but reasonably. The exit option should be easily exercisable by the customer with minimum notice period and without impediments. This would address issues of borrowers being locked into contracts, serve as a consumer protection measure and also help enhance competition.

Further, IBA should evolve a set of guidelines for easier and quicker transfer of loans, particularly mortgage / housing loans. There could also be penalties for banks which do not cooperate with borrowers in this regard.

RBI has asked the IBA to develop case studies and examples of best practices for customer service; conduct studies to identify areas of best market conduct practices for improvement; and conduct training for industry representatives.

The grievances redressal systems in banks should be made robust and responsive to customers' needs. RBI said it would penalise banks which do not put in place adequate measures, as evidenced by repeated complaints.