Base Rate Will Not Affect Home Loan
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Base Rate for loans is effective from July 1, 2010. Base Rate is a more objective reference number than the benchmark prime lending rate (BPLR). The impact of Base Rate for individual customers could be 25 basis points more or less when compared to the current rate of interest that is being paid. However, existing customers will not be impacted immediately.
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The base rate (BR) is the minimum rate of interest that a bank is allowed to charge its borrowers. However, all existing loans, including home loans and car loans, will continue to be at the current rate. Only the new loans taken on or after July 1 and the old loans that are renewed after this date will be linked to BR. The fixing of base rate by banks will not have any effect on the cost of borrowing for home loan clients. However, this will change with the hike in interest rates by RBI to curb inflation. A host of leading banks announced their base rates on Wednesday to 7.5 per cent per annum.
A bank can change its BR every quarter, and also during the quarter. A host of factors, like the cost of deposits, administrative costs, a bank’s profitability in the previous financial year and a few other parameters, with stipulated weights, are considered while calculating a lender’s BR. Only the new loans taken on or after July 1 and old loans being renewed after this date will be linked to BR.
Unless mandated by the government, the RBI rule stipulates that no bank can offer loans at a rate lower than the BR to any of its borrowers. However, all existing loans, including home loans and car loans, will continue to be at the benchmark prime lending rate (BPLR). After July 1, no bank can lend at rates below BR. Banks’ net interest margins will be unaffected. The impact on banks’ profitability because of moving to the BR regime is not clear yet. Indications are that home finance rates are unlikely to rise unless the RBI hikes interest rates to tame inflation.
BR is a more objective reference number than the benchmark prime lending rate (BPLR). BPLR is the rate at which a bank is willing to lend to its most trustworthy or low-risk customers. However, often, banks lend at rates below BPLR. For example, most home loan rates are at sub-BPLR levels. Some large corporates also get loans at rates substantially lower than the BPLR. For all banks, BR will be much lower than their BPLR. However, there is a chance that some corporates, with low-risk profile, would get a lower rate under the new system as under the BR regime, banks are expected to take into consideration the risk levels of a borrower.
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