After directing banks not to offer zero per cent finance for purchase of consumer goods, the Reserve Bank of India (RBI) might also crack the whip on home loan products offering cash back facility or EMI (equated monthly installment) waiver, people familiar with the development told Business Standard. The banking regulator is likely to review these products so see if pricing was done in a transparent manner.
The proposed move is guided by the central bank's objective of fair and transparent pricing of loan products. RBI wants customers are made aware of their yearly borrowing cost at the time they take loans. RBI has been in discussion with banks to evolve "annual percentage-rate mechanism" - a practice followed globally that ensures customers know the exact annual burden on them.
With interest rates staying firm, top private banks have introduced home loan products offering EMI waiver and cash back to drive retail loan demand.
In September 2012, Axis Bank had launched a housing loan scheme where a borrower was not required to pay the last 12 EMIs if he had repaid money on time.
This product - 'Happy Ending Home Loan' - is being offered at the same rate as a regular loan and given to new customers under the floating-rate option. The EMI waiver is offered on housing loans with initial tenure of 20 years or more after crossing the 15th year with Axis Bank.
Two months later, ICICI Bank, the country's largest private lender, introduced a housing loan product offering borrowers one per cent cash back on every EMI for the entire tenure of the loan.
Under this scheme, cash back starts accruing from the first EMI month onwards and is credited to a customer's account after completion of the 36th EMI month. Subsequently, the one per cent cash back is accumulated every EMI month and credited to the customer’s account after every 12th EMI month.
The bank also offered customers the option to renew their fixed-rate loans for two, three or five years at zero conversion fee, within 30 days of completion of the initial fixed rate tenure.
According to bankers, these products have been more popular among retail customers than traditional home loan products.
Sources, however, say the central bank does not appear convinced that these schemes disclose customers' annual borrowing cost transparently.
RBI has already asked banks to discontinue zero-per-cent EMI schemes offered on purchase of consumer goods. It has also directed banks that if a customer avails of a loan to purchase a product on which the manufacturer or dealer is offering discount, the lender must pass on the benefit to the borrower, without tampering with the applicable rate of interest. Banks have also been asked to severe relations with merchants that charge fees for use of debit cards for making payments.