JULY 1, 2010, was a significant date for banks and borrowers. That was the day when the new regime for benchmarking home loans – the base rate system – came into being. Now, interest rates on all loans extended post July 1 are linked to the new system.
The new system was introduced by the Reserve Bank of India (RBI) in response to complaints from home loan borrowers of the partisan approach adopted by banks while raising home loan rates. Banks were accused of making attempts to entice new borrowers with lower rates even as the benefits of a benign interest regime were sparingly passed on to existing borrowers. And in a hardening rate scenario, banks rarely hesitated to increase rates for old borrowers. The base rate system was put in place with the objective of enhancing transparency in loan pricing and ensuring fair treatment to all borrowers. Now, banks are required to review their base rates at least once every quarter and ensure that any changes made are passed on to all classes of borrowers.
After the RBI raised its key policy rates in its quarterly monetary policy review on January 25, 2011 several banks have taken the cue and hiked their respective base rate as well as benchmark prime lending rate (BPLR). Borrowers whose loans are currently linked to PLR can take a call on moving to base rate and the bank cannot charge any fee for effecting the transfer. While it is yet to be seen if the new benchmark will indeed benefit old borrowers, many are of the opinion that switching over would certainly result in noticeable gains. For the purpose, you need to get in touch with your bank and inform them that you intend to adopt the new system. There is no standard format prescribed for making the switch. Your bank, though, may ask you to submit the relevant application form or a letter stating your intent. Once you accept the new terms, the bank will have to facilitate the transition.
If you are one of those whose home loan continues to be linked to PLR, you would do well to analyse your current situation before switching to the base rate. For instance, if you are very close to clearing the entire loan, say a year from repaying the entire amount, you need to compare the present home loan rates – the one benchmarked to the base rate as well as the one linked to the PLR. If the latter is lower, you can look at continuing with it. However, if the last instalment due is several years away, you should definitely consider making the switch, even if the PLR linked rate is lower than the one tied to the base rate. This is simply because the latter is a more transparent mechanism and is likely to reflect changes in the interest rate environment effectively. Lastly, if you have taken a home loan under the 'teaser' or 'special' home loan schemes that were in vogue till recently, you needn't take any action at all. Once the fixed-rate period expires, your new rate will be automatically linked to the bank's base rate then.
