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Banks ask RBI to Clarify Pricing of Old Home Loans
Source: Indian Realty News Feb 24, 2010
Banks have sought clarity from RBI on pricing of old home loans once the new 'base rate' regime sets in. Loan agreements, stretching for 15-20 years, have no provision for replacing the prime lending rate (or PLR) - the anchor interest rate to which the floating rates are linked. However, RBI has told banks to start benchmarking loans to a 'base rate' instead of the PLR from April 2010. The base rate is to be calculated on a cost-based formula and would be lower than the PLR, while banks are free to charge a risk spread over the base rate they cannot lend below the base rate.

Significantly, RBI has directed banks that at the time of loan renewals or resetting interest charges, banks should take the 'base rate' as the anchor rate. Since home loan agreements, like other loan deeds, are legal documents, bankers fear that many retail borrowers will resist a switchover from PLR to 'base rate' and signing on a new agreement. Bankers will also have to grapple with the fact there is no renewal date in case of home loans and existing loan agreements are for the entire tenure of the loan. Secondly, since the base rate is a floor rate, there is a possibility that interest rates on some home loans may have to be hiked if the base rate of the bank is higher than existing loan rates.

At least, three senior bankers told ET that there is ambiguity on the matter and they are seeking clarity from RBI. "The moot point is the floating rate home loan do not have renewal clause, making it difficult for banks to link these loans to base rate. Alternatively, banks can give customers an option to shift to base rate. But, if customers have availed of loan at rate lower than the base rate, they may resist shifting to base rate. Banks also cannot force base rate on them as it's a legal document (loan agreement)." The other alternative would be to maintain two parallel rates -PLR and base rate till the maturity of all old loans in their book. However, bankers feel this move may not go down too well with RBI.

The central bank aims to do away with discriminatory prices for old and new customers. As of now, all old home loan customers are paying higher rate interest compared to new home loan borrowers, even when both of them have taken floating rate loans. Banks say they have priced new loans at cheaper rate because their incremental cost of funds came down. But RBI has urged that reduction in incremental cost also results in reduction in overall cost of funds and thus the benefit of lower rate should be passed on to old borrowers as well. Thus if BPLR continues to be anchor rate for old home loans, it may negate the propose of introducing base rate.

"In case of short-term loans given to corporates, individuals and small businessmen, banks may have to keep alive its BPLR. But whether it can be kept active for home loan which has a 15-year maturity is yet not clear," said a senior banker. Also, one of the key reasons for RBI to introduce base rate was to improve the transmission of police rate to the credit market. Very often, RBI has observed that the reduction in policy rates has not translated in banks lowering lending rate by the same quantum. In the policy document of January 2009, RBI governor, D Subbarao pointed out: "While changes in RBI's policy rates were quickly transmitted to the money and government securities markets, transmission to the credit market was slower. Evidently, the transmission is still in progress."

Between October 2008 and December 2009, RBI substantially reduced policy rates - the repo rate by 425 basis points and the reverse-repo rate by 275 bps. CRR was also reduced by 400 basis points of NDTL. But reduction in the range of BPLRs was 125-275 basis points by public sector banks, followed by 100-125 basis points by private banks and 125 basis points by five major foreign banks.

Tag: Real Estate India, India Properties, Home Loans
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