You are frustrated about your bank not passing interest rate cuts to you. You are not alone. They are many borrowers like you.
Even the Reserve Bank regularly expresses its displeasure since monetary transmission is affected if the bank don’t pass the rate cuts swiftly to the borrowers.
The Reserve Bank tried to bring many measures to hasten the transmission and bring relief to borrowers. BPLR regime gave way to Base regime. Base Rate gave way to Marginal Cost of Funds based lending rate (MCLR) regime.
However, many borrowers and even the Reserve Bank feel that the lending rates are sticky on the downside i.e. banks are very swift in passing interest rates hikes to the borrowers, not as swift in passing interest rate cuts.
Home loans are offered at a spread over the benchmark
For instance, home loans linked to MCLR are offered as MCLR + Spread.
The spread is constant during the tenure of the loan and may depend on multiple factors such as your credit score and the quantum of loan.
The benchmark keeps fluctuating. Since the benchmarks (MCLR and base rate) are internal to the bank, many borrowers feel that the banks manipulate the numbers to keep the benchmark high even when the interest rates (in general) are moving down.
What if your home loan interest rate benchmark was external and not controlled by the bank?
Clearly, you can expect interest rates for such loans to be way more transparent.
CitiBank has introduced a home loan product with an external benchmark
Citibank has come out with a home loan product where the interest rate is linked to 3 month Treasury bill Rate.
Do note Citibank has no control over the 3 month Treasury bill rates.
Citibank refers to this benchmark as Treasury Bill Benchmark Lending Rate (TBLR).
TBLR is based on 3 month Treasury Bill benchmark rate published by Financial Benchmarks India Private Limited (FBIL).
The rate published by FBIL on 12th of every month is rounded off to nearest 5 basis points to arrive at TBLR.
For instance, if the 3 month Treasury Bill benchmark (FBIL-TBILL) is 6.16% p.a., TBLR for the loan will be 6.15% p.a.
If the 3 month Treasury Bill benchmark (FBIL-TBILL) is 6.18% p.a., TBLR for the loan will be 6.20% p.a.
For the latest TBLR, you can visit this link on Citibank Website.
What is FBIL and how is the benchmark arrived at?
FBIL is an independent entity owned by Fixed Income Money Market & Derivatives Association of India (FIMMDAI), Foreign Exchange Dealer’s Association of India (FEDAI) and Indian Bank’s Association (IBA).
FBIL publishes many benchmarks including MIBOR, CD rates, Treasury bill rates and G-sec rates.
Treasury Bill benchmark (FBIL-TBILL) is announced for seven tenures: 14 days, 1 month, 2 months, 3 months, 6 months, 9 months and 12 months.
The benchmark is published on a daily basis.
The Citibank home loan benchmark is linked to 3 month Treasury Bill Benchmark rate (FBIL-TBILL-3 months).
You can read about the methodology of calculation of benchmark here.
What are Treasury Bills?
Treasury Bills are short-term borrowing instruments issued by the Government of India. Treasury bills mature in up to 1 year from the date of issuance. These bills are issued by the Reserve Bank of India at a discount to face value and redeemed at face value (discount is your return from the investment).
There is no credit risk since the treasury bills are issued by the Government of India,
These bills are actively traded in the secondary market and the FBIL uses such trading data (for bills with residual maturity between 72 and 115 days) to calculate the benchmark (FBIL-TBILL-3 months).
What will be the spread on such loans?
The spread is different for various loan products and may depend on multiple factors including your credit score, occupation and the quantum of loan.
The spread remains constant throughout the loan tenure.
Following is the snapshot of the present rates (As on March 26, 2018) on the Citibank website.
You can check the latest spreads and effective lending rates at this link.
As you can see, the spread ranges from 1.95% p.a. to 3.05% p.a.
FBIL-TBILL-3 months on March 12, 2018 was 6.2% p.a. Citibank TBLR will be 6.2% (rounded off to nearest 5 basis points).
Therefore, if you take the loan today (March 26, 2018) your effective home loan interest rate will range from 8.15% p.a. to 9.25% p.a.
How frequently will your interest rate change?
The interest rate will change once every quarter.
The interest reset dates are March 1, June 1, September 1 and December 1.
Therefore, if you take the loan today (March 26, 2018), your interest rate will be revised on June 1, 2018. For the purpose of rate reset, TBLR will be based on FBIL-TBILL-3 months (as on May 12, 2018). Subsequently, the rate will be revised every three months on the reset dates.
What are the benefits of this loan product?
TBLR is way more transparent than MCLR.
TBLR is an external benchmark and the bank has no discretion.
With TBLR, you know what is coming. You simply need to check the 3-month treasury bill rates. There will be lesser surprises. You don’t have to hope.
When the interest rates are going down, you can expect the home loan interest rates to go down too. Something that does not happen so easily with MCLR and base rate.
From the perspective of the regulator, if all the banks start following such benchmarks, the transmission of monetary policy can be much swifter.
What are the problems?
The flipside is that you can expect your loan interest rate to be a bit volatile.
In case of MCLR or base rate, the bank (the way the benchmarks are calculated) is likely to cushion you from such volatility. Well, the cost of borrowing for the bank does not change drastically overnight.
No such cushion in case of the external benchmark.
Treasury Bill rates may fluctuate due to liquidity, fiscal position and even global events. Therefore, even though the rate is transparent, you can expect this benchmark to be quite volatile.
For instance, 10-year Government bond yields have shot up by up to 150 basis points over the last 15-18 months. I am sure home loan interest rates didn’t go up by that much during the period.
The FBIL-TBILL data is available for only the last year. I accessed this chart on tradingeconomics.com.
Do note this is only the 3-month treasury bill rate. You need to add spread to it to arrive at your loan rate.
And you need to compare it with the base rate or MCLR linked loan. Mint did a comparison of 3-month T-Bill yield with base rate and MCLR from SBI. You can read the article here.
Secondly, do consider the spread too. A high spread may take away the benefits of a lower benchmark.
However, do expect spread on TBLR loans to be quite high. TBLR is a very short-term borrowing rate and is likely to on the lower side. You can’t expect the bank to lend to give a long-term loan at that rate. A higher spread is needed to make things even.
“How high” is the question.
Can you switch between TBLR and MCLR?
Depends on terms and conditions of your loan agreement.
We can talk about what Citibank is doing.
For now, Citibank has allowed its existing customers (on-base rate or MCLR) to shift to TBLR.
However, the interest rate will remain the same. The spread over TBLR will be adjusted to keep the rate of interest same (as in MCLR or Base rate regime). Once you have switched, your loan interest rate will fluctuate with changes in TBLR.
Citibank has also allowed moving back from TBLR to MCLR (if you don’t like TBLR). Again, at the time of the switch, the spread will be adjusted to keep the rate of interest constant. Subsequently, the rate will vary as per changes in MCLR.
Do note switch (from TBLR to MCLR) is only allowed to those borrowers who opted for TBLR at the time of taking a new loan.
Should you opt for TBLR instead of MCLR?
I am not very sure about this. Quite possible things will even out over the long term.
TBLR is clearly quite transparent. If you are perennially unhappy about the bank not passing the rate cuts to you, TBLR may be the right benchmark for you.
However, be comfortable with the volatility in the benchmark. Depending upon your loan agreement, your monthly EMI or loan tenure may change frequently (and sharply) with TBLR.
Point to Note: TBLR is the term used by Citibank. Unlike MCLR or base rate, TBLR is not an industry term. Other banks, if they launch such a product, may have a different nomenclature. Not just that, they may choose to link their benchmark to say 1-year T-Bill rates or 10-year Govt. Bond yields or any other external benchmark.