Banks should have benchmark rate for home loans, says RBI

Mumbai: The Reserve Bank of India (RBI) has suggested that banks should have a benchmark rate for home loans to ensure that their cost of funds is protected.

In its annual report, the RBI has cautioned banks against an unbridled growth of housing finance and advised them to take due precaution in the matter of interest rates, margin, reset period and documentation.

"While the increase in disbursement of housing finance is heartening, cause for potential worry is that by lowering the lending rates, banks are approaching the cost of funds," according to the apex bank. Banks set their lending rates lower on housing loans and at times below prime lending rate, due to a lower risk weight.

The interest rate on home loans is hovering in a range of 7.50-9.75 per cent, which is higher than the interest rate on longer-term deposits of commercial banks by 1.5-3.75-percentage points.

In most cases, banks are not covering more than 85 per cent of the cost of property within an overall ceiling of Rs 50 lakh, with differential margins, separately on land and building of houses, the RBI said.