India Financials Draft guidelines on credit pricing:: JPMorgan

India Financials Draft guidelines on credit pricing

The RBI today released draft guidelines on Credit pricing by banks. The RBI had constituted a working group to examine discrimination in credit pricing between old and new customers & sudden changes in spreads by banks. RBI has asked for comments on the recommendations by May 16, 2014. We believe the guidelines are marginally negative for banks as it would make the ALM management more difficult and banks will be more vulnerable to money market fluctuations.

· Change in spreads. Banks will not be allowed to increase spreads except in the case of deterioration of credit profile of a customer. We believe it will be negative for banks with volatile funding costs and hence margins could remain under pressure. It will also be negative for PSU banks as they have a high proportion of base rate-linked loans.

· Uniform floating-rate products. A new benchmark rate for floating rates products-starting with home loans will be developed and published on a periodic basis. Banks can consider to offer floating rate loans based on the new benchmark rate. Though this is just a suggestion, it will be difficult for banks to implement it given a different funding profile. Also banks with higher share of retail loans will be impacted.

· Option for retail borrower to prepay loan before maturity. Banks should give the option to borrowers to prepay retail loan before maturity. The customer should be able to prepay loans without any impediments. We believe it will make banks more vulnerable to interest rate fluctuations and ALM management will become more difficult.

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