Home loans are offered at a spread over the benchmark. Typically, the benchmark is related to cost of funding for the bank. For instance, MCLR (Marginal Cost of Funds based lending rate) and Base Rate are based on cost of funding for the bank. The quantum of spread depends on multiple factors including quantum of loan, nature of your employment/occupation and your credit rating.
Marking a significant departure from this approach, Citibank has linked its home loan interest rates to 3-month Treasury Bill Rates. i.e., the benchmark for this loan is 3-month Treasury Bill rate. The peculiar thing about this loan product is that the home loan benchmark is external. Citibank has no control over this benchmark. This is quite unlike Base Rate and MCLR regimes, where the benchmark rate is derived from cost of funds for the bank. Therefore, under such a product, the interest rate you pay will have no link to the cost of funds for the bank. Let’s find out more about the benchmark and such loans.
What is Treasury Bill Benchmark Lending Rate (TBLR)?
Citibank website refers to this loan benchmark as Treasury Bill Benchmark Lending Rate (TBLR). TBLR is based on 3-month Treasury Bill benchmark rate published by Financial Benchmarks India Private Limited (FBIL). The rate published by FBIL on 12th of every month is rounded off to nearest 5 basis points to arrive at TBLR. For instance, if the 3-month Treasury Bill benchmark (FBIL-TBILL) is 6.26% p.a., TBLR for loan will be 6.25% p.a. If the 3-month Treasury Bill benchmark (FBIL-TBILL) is 6.28% p.a., TBLR for loan will be 6.30% p.a. For the latest TBLR, you can visit this link on Citibank Website.
What Is FBIL and How Is the Benchmark Arrived At?
FBIL is an independent entity owned by Fixed Income Money Market & Derivatives Association of India, Foreign Exchange Dealer’s Association of India and Indian Bank’s Association. FBIL publishes many benchmarks including Treasury Bill rates for 14 days, 1 month, 2 months, 3-months, 6 months, 9 months and 12 months. The benchmark is published on a daily basis. You can read about the methodology of calculation of benchmark here. As mentioned above, the Citibank home loan benchmark is linked to 3-month Treasury Bill Benchmark rate. For more on FBIL and the benchmark, you can visit FBIL website and the Treasury Bill Benchmark rate (FBIL-TBILL) page.
What are Treasury Bills?
Treasury Bills are short-term borrowing instruments (up to 1-year) issued by the Government of India. These bills are issued by the Reserve Bank of India (RBI) at a discount to face value. Since the treasury bills are issued by the Government of India, there is no credit risk. These bills are actively traded in the secondary market and the trading in the secondary market forms the basis for calculation of benchmark.
What Is the Spread on Such Loans?
The spread is different for various loan products and depends on your credit score and occupation. The spread will remain constant throughout the loan tenure. Following is the snapshot of the present rates (As on March 7, 2018) on the Citibank website.
You can check the latest spreads and effective lending rates at this link. As you can see, the spreads ranges from 1.95% p.a. to 3.05% p.a. The 3-month FBIL-TBILL benchmark rate is 6.29% p.a. Effective TBLR is 6.30% p.a. (rounded to nearest 5 basis points). If you add a spread of say 225 basis points, the effective loan interest rate is 8.55% p.a. If you are a new customer, you will get loan at TBLR applicable during the month + Spread.
How Frequently Will Your Interest Rate Change?
The interest rate will change only once every quarter. The interest reset dates are March 1, June 1, September 1 and December 1.
What Are the Benefits of This Loan Product?
One grouse that many home loan borrowers have is that their home loan interest rates do not fall fast enough. While they see interest rate of their fixed deposits fall sharply, the reduction in home loan rates is never that swift or to that extent. Even though introduction of MCLR (in place of base rate) made rate (or monetary transmission) transmission swifter, it is still linked to cost of funds (borrowing) for the bank. It is not easy for most people to fathom how MCLR is actually calculated. Now, 3-month Treasury Bill rate is easily available on a daily basis. A bank cannot manipulate (or so I believe) these rates. Therefore, such rates are clearly more transparent. Since this is an external benchmark, the transmission of monetary policy should be much quicker.
What Are the Caveats?
The 3-month Treasury Bill rate can be susceptible to liquidity, fiscal position and even global events. Therefore, even though the rate is transparent, you can expect this benchmark to be quite volatile. For instance, without looking into the reasons, 10-year Government bond yields have shot up from 6.2% p.a. to 7.7% p.a. over the last 15 months. As a borrower, you need to look at the spread too. As we saw earlier, the spreads are much higher for these loans.
Can Existing Citibank Borrowers Shift to TBLR?
Citibank has allowed its existing customers (on base rate or MCLR) to shift to TBLR. However, the interest rate will remain the same. The spread over TBLR will be adjusted to keep the rate of interest same (as in MCLR or Base rate regime). Once you have switched, you loan interest rate will fluctuate with changes in TBLR. Citibank has also allowed to move from TBLR to MCLR, if you don’t like TBLR at a later date. However, at the time of switch, the spread will be adjusted to keep the rate of interest constant. Subsequently, the rate will vary as per changes in MCLR. Please note this switch is only allowed to those borrowers who opted for TBLR at the time of taking a new loan.
Should You Opt for Such Loans?
To be honest, I have not been able to firm up my mind on this. It can be a double-edged sword. Even though the TBLR linked loans are extremely transparent, the benchmark itself can be quite volatile. This may lead to frequent changes in EMI or loan tenure due to change in 3-month treasury bill rates.