The Committee on Household Finance has proposed that banks should quote mortgage and collaterlised loans to customers using the Reserve Bank’s repo rate rather than based on their own marginal cost of fund based lending rate (MCLR). The committee, set up after discussions in the sub-committee of the Financial Stability and Development Council (FSDC-SC), has set out several recommendations on enabling better participation by Indian households in formal financial markets, including a regulatory sandbox for assessing the role of new financial technologies and products.
The committee has also recommended that SARFAESI provisions should be made applicable to smaller loan sizes below Rs 1 crore. “Moving to a standardised rate plus spread quoting convention would thus provide prospective borrowers with a useful benchmark for cross-product comparison,” the panel said.
“All banks should use the same reset period, which should be one month. Under the current system, in effect, floating rate loans have a fixation period of roughly one year. This may impede the monetary transmission mechanism, and not allow borrowers to immediately benefit from interest rate drops,” said the panel headed by Tarun Ramadorai, professor of financial economics, Imperial college London. For fixed-rate loans, the panel recommended that quoting conventions be changed, so that banks quote the rate for every fixation period relative to the repo rate.
“While the borrower still has to compare the rate for the appropriate fixation period across banks, the universal quoting convention should facilitate easy comparison both along this dimension, as well as across fixed and floating-rate loans,” it said.
The committee has also recommended that SARFAESI provisions should be made applicable to smaller loan sizes in an attempt to bring “underground” collateralised lending into the mainstream. SARFAESI is currently not applicable to loan sizes below Rs one crore. “The recovery process under the SARFAESI and RD Act is substantially shorter than the debt recovery procedure before the Tribunal. This means that access to collateral in the event of default on smaller obligations is currently very onerous,” it said.
To encourage the annuity industry, the panel said households should be allowed the choice to shop for the best annuity plan, and recommended segregating annuity investment from insurance investment. It also suggested that in the short-run, until such time as these markets are better developed, there is a need to relax the investment guidelines of annuity funds so that they have more flexibility to optimise their portfolios. The panel also proposed a simple, cost effective insurance policy for households, which can cover the structure and contents of a household, at a low monthly premium. It also proposed a low-cost travel insurance plan for senior citizens, including a coverage of personal accident, medical treatment, baggage insurance, and transfer of mortal remains.
The committee also recommended low-cost catastrophe insurance, which should be made low cost and potentially even mandatory when purchasing properties in zones that are at risk of natural disasters. “These policies will have a hassle-free claim procedure including auto triggered payouts in the event of catastrophes occurring,” it said. On health insurance, the panel said: “While all these schemes exist, little is known about why usage of health insurance is low overall, and why most households borrow to finance medical costs. We recommend that a wide range of both public and private hospitals should accept these insurance policies as cover, with an appropriate mechanism of claims to be worked out to enable easy access to high quality medical care.”