Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)  

In A First, Citi Launches T-Bill Rate Linked Home Loan

Even as rivals continue to be reluctant about adopting external benchmarks for setting lending rates, American lender Citi today launched the country’s first market benchmark rate-linked lending product.

The bank has introduced a home loan product that will be linked to the rate of treasury bills, which is used by government for its short-term borrowings.

The lender, which already has similar external benchmark-linked products in other markets like the U.S. and Singapore, said it does not see any impact on net interest margin, a key determinant of profitability, because of the launch of the product where a borrower’s rates will be reviewed every three months.

Frustrated at poor transmission of its policy moves into lending rates for borrowers, the Reserve Bank of India had last October mooted the idea of moving to a market-linked benchmark and suggested three such instruments, including the T-bills rate, the rate for certificate of deposits, and its own repo rate to determine the interest rate.

Bankers, led by their lobby group Indian Banks Association, had opposed such a move, claiming that the existing marginal cost of funding based lending rates is working well and also pointed out that deposits are not linked to any market benchmark.

Citi’s country business manager for global consumer banking Shinjini Kumar, said a shift to a market benchmark like the T-bill is transparent, simple and will also help with better transmission.

Loans will be sold at a fixed spread above the T-bill rate which will be maintained throughout the loan tenure, she said, adding that there will be quarterly re-adjustments for the borrower.

There will be a range of spread above the T-bill rate which the bank will follow, its head of secured lending Rohit Ranjan said, adding the average spread will be 2 percentage points. Existing customers will also be able to use the new product without any refinancing costs, he added.

The bank’s country treasurer Badrinivas NC sought to downplay concerns surrounding customers being exposed to T- bill rate volatilities, which may happen due to external events like the taper tantrum in 2013 and hinted that the rates also reflect the policy decisions at a particular point of time which get captured through the quarterly resets.

He said the bank has a diversified liability profile, including a high 60 percent composition on the low-cost current and savings account deposits and also other retail term deposits, which will make it possible for it to offer such a product.

The bank feels the RBI will be on a long pause and may go for a hike in rates only if there is a surge in inflation, he said.

In a few cases, especially concerning top corporates, the bank has been benchmarking rates against market benchmarks but those were deals done on a one-on-one basis, and this is the first time that any lender is going to the market with such an offering, Kumar said.

The bank had a gross home loan book of Rs 9,000 crore, while the overall India book stood at Rs 57,000 crore as of December 2017. Even as rivals struggle with dud assets, its NPAs on the mortgage lending is a healthy 0.05 percent, the bank said.

Commenting on the recent changes in priority sector lending requirements for foreign banks, Kumar said Citi is already compliant on PSL requirements, including the sub- categories and in some cases it uses priority sector lending certificates.

The bank will be resorting to use of digital technologies and tying up with partners to comply with the new requirements, she said.