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How recent changes in RBI rules affect you

How recent changes in RBI rules affect you

The Reserve Bank of India is the regulator of India’s banking and financial services sector. It holds the reigns of all the banks and financial institutions. Sometimes, it brings out its whips to cull out schemes that according to the RBI are not in the interest of customers. Some directly affect the common man, some don’t.


Here are latest moves by the RBI that will directly impact consumers:

1) Interest rates on loans: The RBI, in its mid-quarter monetary policy review on Friday, increased the benchmark lending rate – repo rate – by 0.25% to 7.5%. This is the rate at which RBI lends to banks. This means, interest rates on all kinds of loans cannot fall below this level. For those who have opted for loans with floating interest rates, equated monthly interest (EMI) payments will now cost more. Under a floating interest rate loan scheme, lending rates are not constant. This comes handy at a time when interest rates are expected to fall as loans turn cheaper. But when rates are hiked, it also means interest payments will rise.

2) 0% EMI schemes: Banks provided an option to break up payments for purchases via credit cards into interest-free monthly instalments. According to an Economic Times report, the RBI has now frowned upon such schemes as it feels the consumers are being fooled. Such schemes give an impression that bank funding is free, tempting customers to make big-ticket purchases. However, the reality is that the interest cost is passed on in the form of a processing fee and other similar charges. This often means a consumer is paying a lot more than the retail value of the product. Nearly 20-30% of total sales of consumer goods are conducted via EMI schemes. This had led to a 34% jump in bank loans for buying such goods in July from the previous year, as compared to a 12% rise between July 2011 and 2012.

3) 80:20 home loan scheme: The RBI has also brought the whip on home schemes like 80:20 or 75:25. Under the scheme, home loan EMIs were paid by the developer until the buyer got possession of the house. Also, the entire home loan amount is disbursed to the developer upfront. The RBI believes that this exposes banks and consumers to considerable risk in case of a default or delay in the project completion. This will also lower the buyer’s credit rating as the loan is serviced on his name.

4) Stock investments: If you had invested in banking stocks this time last year, the value of your investments would now be one-tenth less. The BSE’s banking index is down 11% from September 2012. The key reason for the underperformance on banking stocks is the RBI’s strict interest rate regime. To put a lid on high inflation, and curb rupee’s fall, the central bank has kept rates at high levels. This means loans will become costlier, which might deter customer demand and affect banks’ loan book and overall financial health. Banking stocks almost always underperform after a hike in rates. The same goes for realty stocks as any change in lending rates affects both the companies – which have to borrow heavily to finance projects – and demand from buyers. Thus the operating environment becomes difficult for realty companies, which are already bogged down by high debt. The BSE’s realty index is down nearly 11% in the past one year.

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