Banks have sought for clarity regarding pricing of old home loan rates from RBI in the context of the new ‘base rate system' which ought to set in from April 2010. Home loans that have been set for 15-20 years have no provision for change in their interest rates that is the prime lending rate (PLR) to which floating interest rates is linked.
The issue has arisen due to RBI's new directive regarding the incorporation of base rate system by banks as the basis for interest rate calculation from 1st April 2010. The base rate is to be calculated on the basis of a cost based system which is lower than the PLR system. The cost based system will depend on factors like cost of deposits, cost of adjustment for negative carry on CRR and SLR, unallocatable overhead costs and profit margin. Banks cannot charge below base rate as they used to in case of PLR in the form of sub PLR.
RBI had come up with this change so as to do away with the discriminatory pricing which banks followed by charging higher interest rate for old customers and lower rates for new customers.
Another major reason behind RBI introducing base rate system was to improve the effect of change in policy rates on the credit market. Very often it had come to the notice of RBI that with increase in policy rates (repo and reverse repo rates) the banks immediately hiked lending rates but the frequency did not match in the case when policy rates were reduced.
RBI has directed banks that while renewing any loan or resetting interest rate they should abide by the base rate system. But home loan agreements are legal documents and banks are concerned over the point that many retail borrowers would resist the switch over to the base rate system and might also not agree to sign a new document.
"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 banks have another fact to deal with and that is home loans are non renewable products. So the clause on renewal of loans will not be applicable in this case.
Again base rate is the floor rate. So it might be possible that the interest rate on home loans have to b hiked if the base rate of banks is higher than the existing loan rate.