Banks have asked for clarification from RBI on costing of old home loans after the new base rate system comes in. Loan agreements lasting for 15-20 years do not provide for substituting the prime lending rate (PLR), which is the base rate to which the floating rates are associated.
But the situation is set to change with RBI making base rate, the basis of fixing the new loan rate. Bankers are worried that as home loan agreements are legal contracts, many retail home loan borrowers won’t be ready to move over to base rate and enter into a new contract. Bankers also have to put up with the fact that there is no renewal date for home loans and the current loan contracts are valid for the whole duration of the loan. Moreover since the base rate is the lowest rate, it is quite likely that interest rates on certain home loans need to increased if the base rate exceeds the current loan rates.
At least 3 senior bankers maintained that there exists haziness on the subject and they are asking for clarification from RBI. This is because the floating rate home loan does not have a renewal phrase, thereby making it harder for the banks to associate these loans to base rate. Otherwise banks can allow borrowers to move over to base rate. But if the rate on current loan is lesser than the base rate, then they may decline to move over to base rate. Banks also cannot enforce base rate on the borrowers as the loan agreement is a legal agreement.