While applying for home loan everyone come across 2 terms i.e. RPLR or BPLR Vs Base Rate. BPLR is Benchmark Prime Lending Rate or RPLR is Retail Prime Lending Rate. For simplicity purpose i will refer BPLR or RPLR as BPLR only. What are these terms and why they are very critical while finalizing Home Loan. In layman terms all the Floating Home Loans are linked to either Base Rate or BPLR. Now 1st question which come to mind is why Floating Home Loans are linked to these 2 different ways of calculation, why can’t financial system follow single criterion to link floating home loans. Answer to this query is that there are 2 sets of Financial Institutions which provide Home Loans (a) Banks like ICICI, Axis, Bank of Baroda etc (b) HFC’s (Home Finance Companies) like HDFC, LICHF, PNBHF etc
The key difference between Banks and HFC’s is that Banks are governed by RBI (Reserve Bank of India) and HFC’s are governed by NHB (National Housing Bank). Now before proceeding further let me introduce 1 more term “Spread” for floating Home Loans under BPLR. What is spread? It is the discount or Mark up offered by Bank or HFC on its existing BPLR. Let me give u e.g. suppose today u approach 2 institutions i.e. Axis Bank and HDFC (Let me clarify, its not HDFC bank but its a HFC which does not have any relation with HDFC Bank except it issues loan cheques from HDFC Bank account ) for your Home Loan Requirement. Before July 01, 2010 all the home loans were governed by respective BPLR or RPLR but there were lot of complaints under that regime, customers complained of 2 pain areas one each customer is paying differential interest thus some customers are paying very high interest rates compared to others and second Banks or HFC’s are not transparent in declaring their BPLR’s. Just to share e.g. If any customer took loan when interest rates were low say 8.5% or in other words on BPLR of 11% he got spread of 2.5% but now BPLR is 15% so he must be paying interest of 12.5% whereas banks or HFC’s are offering discount of 4.5% to new customers and offering interest of 10.5% to new customers and secondly Banks/HFC’s were accused of promptly increasing the BPLR when RBI increase the Key rates but when RBI decreased rates then these institutions didn’t show similar promptness to decrease the BPLR. The reasoning given by Banks/HFC’s was that BPLR is linked to average cost of acquiring the funds for disbursement so RBI introduced Base rates which is linked to marginal cost of acquiring funds. Marginal Cost is prospective in nature (Will impact in future) and Average Cost is Retrospective in Nature (Will be impacted by past). So ideally if RBI increase rate than BPLR should not be increased immediately becoz its impact can be felt only in some time post hike but Base Rate can be increased immediately. Also it not the case that customer cannot change his/her spread, he can do so by paying half of percentage difference between his spread and spread offered by company say if his current spread is 3% and spread for new customer is 5 % then HFC will offer customer to increase his spread to half of difference i.e. to 4% by paying 0.5% of outstanding loan amount.
In order to solve this issue last year RBI issued guidelines to Banks to offer Home Loans linked to Base Rate w.e.f July 01, 2011. Also existing customers can also move to Base Rate from BPLR by giving application to Bank in this regard. Also banks cannot charge any additional amount for moving customer from BPLR to Base Rate.
With this background now we can understand how Base Rate or BPLR can impact ur Home Loan outflow. In a nutshell it will not impact much in terms of interest rate becoz Base Rate has mark up and BPLR has discount. Where it will impact is promptness of Bank or HFC to revise the Base Rate or BPLR in sync with current scenario (read linked to Key Rates of RBI). Now i will explain how it will not impact in terms of interest rate, i will take 2 e.g. one of a Bank A (I will not name but its real example) and second of HFC and will refer HFC B. In Mar’11, Bank A was offering interest rates @ 10.50% (Base Rate was 9.5% and Mark Up was 1%) & HFC B was also offering interest rate @ 10.50% (BPLR was 16% and Spread was 5.5%). Now in mid review RBI increased lending rate by 0.25% and banks were forced to increase Base Rate by 0.25%. Now instead of increasing rates for new customers to 10.75% (Base Rate:9.75% and Mark up of 1%) Bank A decreased Mark up to 0.75% and new customers can still avail loan at 10.5% whereas customer who took loan in Mar’11 will now pay 10.75% Similarly in BPLR scenario, it increased by 0.25% and with 16.25% BPLR and spread of 5.5% customer will pay 10.75% interest only so How the customer is benefited from Base Rate becoz both customers are paying same 10.75% rate of interest.
Lets assume tomorrow Base Rate and BPLR movements are in sync with each other and both increased by 2% compared to Mar’11 than also customer of Bank A (Base Rate of 11.50% and mark up of 1%) and HFC B (BPLR 18% and Spread of 5.5%) will be paying same interest of 12.50%. So only difference is with bank A its mark up above base rate and with HFC B its discount on BPLR). The best possible scenario for customer is to avail loan as close to Base Rate i.e. with least Mark Up and as away from BPLR i.e. with highest discount over BPLR. Though i agree this cannot be fine tuned becoz future is uncertain.
Now only scenario customer of HFC B will loose if say Interest rates come down and HFC B does not decrease BPLR in sync with RBI rates whereas for Bank A it is mandatory to decrease Base Rate after RBI decrease. Say RBI decrease lending rate by 2% and new base rate is 7.5% so customers who availed loan in Mar’11 will pay 8.5% whereas HFC B decrease BPLR by only 1.5% depending on his cost of fund than customer of HFC B will be paying 9% interest. Again this is pure Hypothesis and in current scenario of tight scrutiny Base rate and BPLR will move more or less in sync with each other.
To conclude if u r going with Bank for home loan than be assured of upward and downward movement linked to RBI policy but need to check on Mark up above the base base rate becoz it will help a lot when rates will come down. If u r on least markup than ur rate of interest will come down much faster compared to customers whose mark up is high and if u r going ahead with HFC than only issue is downward movement of BPLR this can be checked easily by asking HFC to provide BPLR history and than u can ascertain whether HFC has decreased rates when RBI decreased the rates in past. Also higher the discount than more benefit when interest will drop. Also remember Mark up and Discounts are not in ur control and it is decided by Banks and HFC depending on competition scenario and other factors.
Update Mar 18, 2012: Currently HDFC Ltd is offering interest rate of 10.5% to new customers with spread of 6% whereas i am paying 11% (Spread of 5.5%)…When i checked with HDFC on same, they offered me to increase my spread to 6% from 5.5% but i need to pay some fees for same.
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