Editorial 1 : Impact of RBI’s lending guidelines
Context
On August 18, apex banking regulator the Reserve Bank of India (RBI) issued guidelines enabling a borrower to transition from a floating interest rate-based loan to one with a fixed interest rate.
About
- According to RBI, the endeavour was to address borrowers’ grievances pertaining to the elongation of loan tenure and/or an increase in the EMI amount in the event of an increase in the benchmark interest rate.
- A lack of proper communication along with the absence of consent formed part of the concerns.
- The provisions would be extended to existing as well as new loans by the end of the current calendar year.
The instructions
- The apex banking regulator has given borrowers the option to switch over to a fixed (interest) rate mechanism for their loans from floating rates.
- This would be based on a board-approved policy drafted by the lending entity.
- The policy must also specify the number of times such a switch would be allowed during the tenure.
- The lender must also transparently communicate to the borrower all relevant charges alongside service charges or administrative costs associated with the transition.
- The responsibility would rest with the lender to communicate clearly, at the time of loan sanction, the impact emanating from the change in regime (floating to fixed), such as the change in EMI and/or tenure of the loan or both.
- The borrower would now also have the option to choose between enhancement of the EMI or elongation of the tenure or a combination of both.
- S/he might also opt to prepay the loan, either in part or full, at any point during the tenure.
- This would, however, still invite foreclosure charges or pre-payment penalty.
- Further, the regulator has sought that lending entities provide borrowers, through appropriate channels, a statement at the end of each quarter enumerating the principal and interest recovered till date, EMI amount, number of EMIs left and annualised rate of interest/ Annual Percentage Rate (APR) — for the entire tenure of the loan.
- The instructions would apply to all equated instalment-based loans of different periodicities albeit with certain changes based on the nature of the loan.
Differences between a fixed and floating interest rate
- Fixed interest rates are those that do not change during the tenure of the loan.
- On the other hand, floating interest rates are subject to market dynamics and the base rate — therefore, the risk differentiation.
- As also contended by several lending entities, floating interest rates are generally lower than fixed interest rates.
- It has been widely argued that their preference for the floating rate-based regime is to better adjust their positions as per the evolving market dynamics.
- The advantages are transmitted onto the borrower’s savings pool, but the opposite also holds true in a rising benchmark rate regime.
- Also noteworthy is the fact that floating interest rate loans do not draw any prepayment penalty— unlike fixed rate loans.
- However, the fixed rate-based regime endows a borrower with greater certainty and security.
- This also helps in better planning and structuring of individual budgets. Thus, prospective borrowers should note broader evolving economic dynamics and accordingly decide the tenure they seek.
Way forward
- About parameters for assessment, Governor Shaktikanta Das had earlier stated that banks would have to consider the payment capacity of the borrower and how long payment capacity would last (the age factor).
- He cautioned that it would be necessary to avoid unduly long elongation which sometime may going forward camouflage the underlying stress in a particular loan.
Editorial 2 : What is heat index and why is it important to measure?
Context
Earlier in August, Iran recorded a scorching heat index of 70 degrees Celsius (°C) in the coastal part of the country, a metric at which survival of life is unfathomable, if not impossible. The country had also declared public holidays on account of “unprecedented heat,”
Heat index
- Heat index, also known as apparent temperature, is a measure of how the temperature feels to humans.
- Relative humidity is an important factor that determines heat index, along with air temperature.
- A complex formula to calculate heat index was published by Dr. Robert Steadman, a professor published two papers titled The Assessment of Sultriness – Part I: A Temperature-Humidity Index Based on Human Physiology and Clothing Science, and Part II: Effects of Wind, Extra Radiation and Barometric Pressure on Apparent Temperature, both describing his calculations of heat index.
- Dr. Steadman’s study considers a typical adult human of either sex, with a height of 1.7 metres and a weight of 67 kg.
- Dew point, which is the temperature at which gas is transformed into a liquid state, is an important factor in the calculation of heat index.
- In terms of atmospheric moisture, it’s the temperature at which air cannot hold any more water vapour, and droplets of water begin to form.
- Dr. Steadman used 14 °C as the dew point in his calculations.
Importance to measure the heat index
- Hot air can hold more moisture than cold air.
- Therefore, when temperature rises, the air’s capacity to hold moisture also increases, thus affecting the apparent temperature or heat index.
- Humidity is typically higher during heat waves — which is why the heat index at the time is usually higher than just the temperature because humid air can feel hotter to humans.
Impacts of high humidity on human body
- High humidity can lead to heat stress, meaning the body is unable to get rid of excess heat.
- Humans usually maintain a core temperature in the range of 36.1 to 37.2 °C.
- When the body is unable to get rid of excess heat, the heart rate increases due to a rise in core temperature, leading to heat-related exhaustion and rashes, among other symptoms.
- It can also be fatal if not addressed promptly.
- At high temperatures, the human body can lose excess heat through perspiration and cool itself.
- But when humidity is high as well, it is difficult to sweat and then for that sweat to evaporate because the air around is already saturated with moisture. This makes it difficult for the body to lose heat.
- On the other hand, if the humidity is low, evaporation of sweat is easier, thus making the apparent temperature feel close to the actual air temperature.
- This is why a measure of heat index is more useful than just the temperature to gauge the impact of heat on humans.
Way forward
- A heat index value of 67°C or above can be extremely dangerous for people and animals who have direct and prolonged exposure,
- With climate change, it is likely that we will continue to witness record-breaking heat index values across the world.
- We will need to prepare and adapt to such extreme conditions by investing in early warning, making changes to work timings, and finding sustainable cooling solutions.