Time and again RBI has urged banks to rethink their BPLR to encourage lending and allow the train of money rotation to chug along at a peaceful pace. Benchmark Prime Lending Rates (BPLR) is a reference interest rate used by Banks as a benchmark to determine the interest rate passed on to the customer. The lending rate to the customers is usually “x%” plus or “x%” minus of this BPLR.
The Reserve Bank of India has been making downward adjustments to some of its critical policy rates since September 2008, to try and counter the recession ripples sent across the country due to the downturn of the global economy.
In a recent move it made further cuts to its repo and reverse repo rates by 25 basis points. The repo rate is the interest rate at which RBI lends money to the banks whenever they need to borrow funds. When the repo rate decreases its good news for the banks as they can avail more funds at a lower interest rate.The reverse repo rate on the other hand is the interest rate at which RBI borrows funds from the banks.
Public sector banks have already set the pace for rate cuts bringing down interest rates, over the past few months. Private banks have followed suit bringing down interest rates a few notches for new customers. However, only after this most recent announcement have the benefits truly been extended to existing borrowers also, which means the BPLR rates are being revised slowly but surely.
RBI has cutits repo rate by 425 basis points and reverse repo rate by 275 basis points since September 2008. Responding to these cuts, PSBs have cut lending rates by 125-225 basis points and deposit rates by 125-250 basis points in the time period spanning September 2008 – April 2009.
In the light of the most recent RBI move, a leading private bank has also cut its BPLR rate by 50 basis points, which is now at 16.25%, however it is still much higher than the current PSBs’ rates which are at a BPLR of around 11.50 % and 13.50% as on April 24, 2009.
Floating interest rates that had been hovering around 14% are now to the tune of around 9%-10%, with some banks bringing it down to a fixed rate of around 8% – 9% for the initial year.
Time and again RBI has urged banks to rethink their BPLR to encourage lending and allow the train of money rotation to chug along at a peaceful pace. Benchmark Prime Lending Rates (BPLR) is a reference interest rate used by Banks as a benchmark to determine the interest rate passed on to the customer. Banks have the freedom to set these rates and the lending rate to the customers is usually “x%” plus or “x%” minus of this BPLR. BPLR is influenced by a host of factors including CRR, repo rate, reverse repo rate etc.
The fact that RBI has been on a cutting spree of its key policy rates is a clear indication for banks to bring their BPLR down by several notches and improve the lending scenario. The idea is to bring in liquidity and ensure money does not form stagnant pools, which can be no good for the economy.
In fact, the RBI has proposed to set up a team to review the current BPLR trends prevalent with various banks. Interest rate forecasts have predicted that the lending rates will stabilise at around 8% for the entire loan tenure like how it was in the year 2004.
The realty market mood
Apart from the fact that RBI needs to revive the struggling economy, real estate is a significant stand alone aspect that is related to easing up the lending scenario. When the going was good, rather incredible, with unrealistic prices skyrocketing beyond the grasp of common man, builders
brought huge land banks, investing a great deal of money. However, it all came crashing down in recent months bringing construction projects to a stand still. Price of raw materials also shot up leaving the builders in a lurch unable to complete projects and left them with the feeling that they had bitten off more than they could chew.
On the other hand there was a spate of cost cutting, lay offs etc. particularly in the IT sector. All these factors led to increasing home loan defaults, strained relations between the buyers and builders who could not keep their word, banks tightening their lending norms, people shelving plans to invest in a home etc.
A wait and watch policy was adopted by everyone involved, the banks, the buyers and the builders. At one point in time, both the banks and builders were not willing to make the required adjustments to either lending rates or property prices respectively and neither was the buyer in any mood to humour either the bank or the builder.
Time for change?
RBI hopes to be the stabilising factor trying to strike a balance and helping everyone to their feet to go about business as usual. These spate of rate cuts are expected to ease up the lending norms of banks, however builders realize that lending rate cuts alone will not nudge the buyer to invest in a home. Though property prices are sliding in the favour of the buyer it still needs to come down further to be able to tempt the buyer, especially when everyone is keen to top up their emergency fund rather than invest in a home loan.
However, the right circumstances where bank lending rates, property prices, job security etc. become a shade or two brighter should provide the platform for the first time home buyer to make his move, after all everyone has a need to own a home! It is considered one of the basic comforts in the Maslow’s hierarchy of needs.
The most recent RBI effort could be the final push that would allow enough and more room for banks, builders and buyers to start moving towards change.
Enlighting article to help the public.
Can you please through light on practices of some banks ,who promise fixed interest rates at the time of taking housing loans and later convert to floating rates much to the surprise of the house owners and strugglings their heads to finds the means of repaying monthly instalments?I am one of the victims of a PSB.
Any information on this will be much useful.
It is high time that RBI forces ICICI Bank, the unethical chor bank which is looting its old customers with BPLR as high as 15% when most of the banks have
reduced it to 8-9%. The spread over should never exceed 2-3% , but it can never be 6-7%. RBI as a controller of Commercial Banks whould fix the spreadover
to around 2=3% and should cancel the licence of Banks charging in excess of it.
For every activity like Electricity, Mobile Phones, Mutual Funds, Share brokers every one is controlled by some controlling agency then why the Commercial Banks
also should have a controlling authority , at present RBI is the controlling authority but it has miserably failed in its duty, it only advises the banks to reduce the
interest rates but does not force them saying let the market decide the rates, which is very unfair on its part, the similar thing can be said for electricity and
Mobile telephoning but the Govt. has appointed the Controlling Authorities for these services, they why not for Commercial Banks also?
Hope RBI does its duty and not look only for the interest of Banks forgetting about its customers who are being robbed like a Highway Robbery.
Prakash has rightly pointed out the spreads of banks once RBI lowers its rate should NEVER be 6-7 % as your article states" RBI has cut its repo rate by 425 basis points and reverse repo rate by 275 basis points since September 2008. Responding to these cuts, PSBs have cut lending rates by 125-225 basis points and deposit rates by 125-250 basis points in the time period spanning September 2008 – April 2009". The private palayers havent eve bothered to reduce lending rates by more than 100 basis points in most cases.That means theres a big room to cut interest rates in order to achieve the economic objectives of RBI in cutting the rates in the first place. If RBI doesnt crackdown on thes finacial institutions in the name of market sets the rates…unfortunately in this global recession things are going to get worse and RBI would have failed implementing its policy for the good of Indian economy.
I agree with Mr. Prakash to a great extent that ICICI bank has been playing havoc with the existing floating rate customers of home loan. They have been very
unscrupuluous in dealing with bonafide existing customers by not passing the benefits of RBI announcements for a long time and still charging more compared to
other banks. On the other hand, they had been very quick in the past to pass on the burdon of any upward revision of rates of RBI like CRR,PLR etc. to thye
existing customers! It needs strict vigil by the RBI as not to give benefits to those unethical palyers who take existing customers for a ride whwnever opportunity
comes.
HDFC Bank is another chor bank in India. It does the same trick as ICICI Bank. ie. for floating rate, it only goes up for the existing customer. mine moved from 9 to 12% in 9months and then reduced to 0.25% to 11.75% after 2+yrs!.
whereas the very same bank gives ~8.75% to new customers!!. What kind of logic is this for the existing customers. I strongly feel, the {political parties which runs the govt + RBI + so-called leading banks (ICICI, HDFC bank) are in nexus to loot the ordinary citizen.
Else how else RBI can justify by just begging to the banks instead of "taking tough actions against" such banks?. What is preventing RBI?. Is it not the "Economy terrorism"? to wreck a havoc on confidence of customers who honestly pay the EMI and be with the bank when the interest rate goes high, but left cheated when interest rate goes down.