When someone applies for a loan against property or any other loan for that matter, there are two approaches which a lender could follow to calculate the applicable interest rates:
(1) Internal Benchmarking,
(2) External Benchmarking.
If the lender decides to do internal benchmarking for interest calculation, this means they would use in-house parameters and their internal policies to decide the mortgage interest rates. On the contrary, if the lender decides to do external benchmarking, the interest rate would be decided based on factors such as treasury bills, repo rate of the RBI as well and other benchmarks as per the Financial Benchmark India Pvt Ltd (FBIL).
Why External Benchmarking?
The RBI - Reserve Bank of India, proposed to link loan interest rates against an external benchmarking policies. The same is expected to come in effect w.r.t April 2019, and would make the entire process increasingly transparent. However, implementation of this policy carries the risk of high volatility.
One of the primary reason why RBI proposed external benchmarking is the fact that the changes in marginal cost of fund-based lending rates was not immediately transmitted by lenders to borrowers.
The banks will refer to factors such as RBI’s repo rate or other benchmarks set by the FBIL, NBFCs are expected to follow the suit.
Bottom line: Given the fact external benchmarking policy will be in effect from 1st April 2019, it would be sensible for potential loan against property applicants to wait for some more time and file their application post the shared date.
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