In 2004, Chennai-based Dr. Raghunath, took a home loan of `7.28 lakh from a private sector bank at 7.5%, even as other nationalized banks were offering higher rates. Today, the same bank is charging him 14.75%. More importantly, the loan that should have been repaid by the time he retires eight years from now has been extended by 21 years.
This is just a case of one person. But there are a lot of borrowers who can relate to this example. For providing a certain amount of relief, the Reserve Bank of India directed banks to move from the BPLR to base rate as the benchmark interest rate for loans granted after 1 July. No banks are allowed to lend below this base rate.
What to do?
If you were unaware of this fact and want to know more about its working, approach your lender and ask what is the basis on which he is charging you the rates. If it’s a BPLR base, then try to negotiate with the bank to change it to the base rate. It is not a very complicated procedure. The borrower can just fill up an application and pay the required fee and request for a change. Doing so, you as a borrower will be benefited when there is a slump in the interest rates.
How it works?
When the interest rates fall, banks will have to lower the base rate, which is a function of the cost of funds in the market. As all the variable rates of interest are pegged to the base rate, the borrowers will gain from any cut in this rate. Hence, it is advisable to opt for it. Although you might not see any immediate benefit from this move, you are likely to gain in the long run especially in those tenors which are of a long duration.
When the rates increase, the BPLR also increases, but when it falls the BPLR rates do not fall. However, this is not the case of base rates. If you think that the rates will not go down don’t worry, when RBI decides for a drop in the rates, the rates will fall. Apart from the rates’ gain, borrowers can be benefited from the increased transparency the base rates phenomenon provides.
The downside
If you have a home loan offered by a housing finance company, such as HDFC and LIC Housing Finance, or have taken it from banks that partner with housing finance companies, such as IndusInd Bank and HDFC Bank, and then you would not be able to shift to the base rate. This is because the base rate system is applicable only to the banks that are governed by the RBI, while HDFC, LIC Housing Finance, etc, are regulated by the National Housing Board, which still operates on the BPLR system.