While applying for a home loan, everyone come across 2 terms i.e. RPLR or BPLR Vs Base Rate. BPLR is a Benchmark Prime Lending Rate or RPLR is a 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 a Home Loan. In layman terms, all the Floating Home Loans are linked to either Base Rate or BPLR. Now the two questions 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 that provide Home Loans (a) Banks like SBI, ICICI, Axis, Bank of Baroda etc (b) HFC’s (Home Finance Companies) like HDFC, LICHFL, PNBHFL 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 one 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 Base rate or BPLR. Let me give you an example, Suppose today you approach 2 institutions i.e. Axis Bank and HDFC Ltd. Let me clarify, it is not an HDFC bank but it’s an HFC. HDFC Ltd and HDFC Bank are sister concern.
Before July 01, 2010 all the home loans irrespective of Bank or HFC were linked to respective BPLR or RPLR. There were a lot of complaints from borrowers under benchmark rate. The borrowers complained about two pain areas i.e. existing borrowers were paying higher interest rates compared to new borrowers. Secondly, Banks or HFC’s are not transparent in declaring their BPLR. Just to share an example, If any borrower availed a loan when interest rates were low say 8.5% or in other words, BPLR of 11% with a spread of 2.5%. Assuming, current BPLR is 15% so he must be paying interest of 12.5%. The banks or HFC’s were offering a discount of 4.5% to new borrowers and offering a lower interest rate of 10.5%. Secondly, Banks/HFC’s were accused of promptly increasing the BPLR when RBI increase the Key rates. On the contrary, when RBI decreased rates then these institutions didn’t show same promptness to decrease the BPLR.
The reasoning given by Banks/HFC’s was that BPLR is linked to the average cost of funds. RBI introduced Base Rates that are linked to marginal cost of acquiring funds. Marginal Cost is prospective in nature (Will impact in future). On the other hand, Average Cost is Retrospective in Nature (Will be impacted by past). So ideally, if RBI increase rate than BPLR should not be increased immediately because its impact can be felt few months after the hike. On the other hand, Base Rate can be increased immediately. To negate the impact, a borrower can change his/her spread, he can do so by paying conversion fees. Conversion fee is normally 0.5% of the outstanding principal amount. Assuming current spread is 3% and spread for new borrowers is 5 % then HFC will offer borrower to increase his spread to from 3% to 5% by paying 0.5% of outstanding loan amount.
In order to solve this issue, RBI issued guidelines to Banks to offer Home Loans linked to Base Rate w.e.f July 01, 2010. Also, existing borrowers can move to Base Rate from BPLR by giving application to Bank in this regard. The banks cannot charge any additional amount for moving a borrower from BPLR to Base Rate. A shift to Base Rate does not guarantee lower interest rates.
How Base Rate or BPLR/RPLR impact Home Loan?
With this background now we can understand how Base Rate or BPLR / RPLR can impact your Home Loan interest outflow. It will not impact much in terms of interest rate because Base Rate has a markup and BPLR has a discount. A markup or discount is also called Spread. The impact will be in promptness of Bank or HFC to revise the Base Rate or BPLR in sync with current scenario (read linked to REPO Rate of RBI). Now i will explain how it will not impact in terms of interest rate. I will take 2 examples, one of a Bank A (I will not name but its real example) and second is of HFC and will refer HFC B. Assuming Bank A is offering interest rates @ 10.50% (Base Rate of 9.5% and Mark Up of 1%) & HFC B is also offering interest rate @ 10.50% (BPLR of 16% and Spread of 5.5%). Now RBI increased REPO rate by 0.25% and banks were forced to increase Base Rate by 0.25%. Now instead of increasing rates for new borrowers to 10.75% (Base Rate:9.75% and Mark up of 1%), Bank A will decrease Mark up to 0.75%. The new borrowers can still avail loan at 10.5% whereas borrower who availed loan before REPO Rate cut will now pay 10.75%. Similarly in BPLR scenario, it will increase by 0.25%. With a BPLR of 16.25% and spread of 5.5%, the old borrower will pay 10.75% interest. If the movement of benchmark rate is same then the borrower is not benefited because both are paying the same interest rate of 10.75%.
Let’s assume, Base Rate and BPLR movements remain in sync with each other. They are increased by 2% compared to initial assumption. The borrower of Bank A (Base Rate of 11.50% and markup of 1%) and HFC B (BPLR 18% and Spread of 5.5%) will be paying the same interest rate of 12.50%. The only difference is that with a bank A, it is markup above base rate and with HFC B it’s discount on BPLR. The best possible scenario for a borrower is to avail loan as close to Base Rate as possible i.e. with least Mark Up. On the other hand, as distant from BPLR as possible i.e. with the highest discount over BPLR. Though i agree this cannot be fine tuned because future is uncertain.
The only scenario in which the borrower of HFC B will lose, if say Interest rates come down. HFC B does not decrease BPLR in sync with RBI REPO rates. Whereas for a Bank A there is no option but to decrease Base Rate. The decrease may not be same as the decrease in REPO Rate. Assuming, RBI will decrease REPO rate by 2%. The new base rate will be 7.5% so borrowers who availed loan initially will pay 8.5%. The HFC B will decrease BPLR by only 1.5% depending on the cost of funds. The borrower of HFC B will be paying 9% interest. Again this is a pure Hypothesis and in the current scenario of tight scrutiny, Base rate, and BPLR will move more or less in sync with each other. It is true that cost of funds for HFC’s will always be higher than Banks. Reason being, HFC’s don’t have access to low-cost CASA funds.
To conclude, if you are availing home loan from bank then be assured of upward and downward movement nearly linked to RBI policy. You need to check on Mark up above the base rate because it will help a lot when rates will come down. If you are near base rate i.e. lower markup then your rate of interest will come down much faster compared to borrowers with a high markup.
In case you are availing home loan from HFC then the only issue is a downward movement of BPLR. It can be checked easily by asking HFC to provide BPLR history. You can ascertain whether HFC has decreased rates when RBI decreased REPO rate in past. Also, higher the discount, the financial benefit of a decrease in interest rates will be more. Always remember, the Mark up and Discounts are not in your control. It is decided by Banks and HFC depending on the competition and other factors. Lastly, As a thumb rule, floating home loans are beneficial when interest rates are on a downward slope. On the other hand, fixed interest rates are beneficial when interest rates are increasing. To know the difference, check my post Floating vs Fixed Interest Rate Home Loan.
Update Feb 08, 2016: As i shared in my post, Marginal Cost of Funds based Lending Rate, the MCLR will replace the Base Rate w.e.f 1st April 2016. It will help in faster and full transmission of REPO Rate cut/increase. Therefore, the home loan interest rate will be market linked. The MCLR will indirectly impact the BPLR or RPLR of HFC. In order to remain competitive, the HFC’s will also match the interest rates offered by banks. Time will tell the impact of MCLR on existing borrowers.
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