Borrowers still have to decided whether to switch to new base rate system

Some of the banks have increased their benchmark prime lending rate (PLR) floating rate, on which they used to lend prior July 1, therefore the borrowers say they have to yet think on whether they should shift the loans to the new base rate system.

According to bankers the borrowers, who find that the rates offered under the base rate system are favorable and less volatile, would not think to move over to the new base rate system.

KR Kamath, CMD of Punjab National Bank, said, “Previous loans that are linked to PLR will get costlier. Hence, borrowers who feel that the hike in the rate will adversely impact them can shift to the base rate system”.

Recently PNB, IDBI Bank and Union Bank of India have raised their PLR rates they offered to their prime borrowers, thus the rates linked to rate will be more expensive.

PNB has raised its PLR to 11.75 per cent from 11 per cent, while Union Bank has increased it to 12.25 per cent from 11.75 per cent. IDBI Bank raised its PLR by 50 basis points. These banks have set their base rate at 8%.

The PLR rates are the rates offered by the bank to its best borrowers where loans can be offered at rates lower than benchmark rate, while the base rate system is rigid as banks cannot give loans below the base rate.

All floating rate loans will be affected by the raise in PLR but the borrowers of home loans will get impacted the most. PNB is offering home loan at 8.75 per cent for a 5 year tenure, 9 per cent for loans of 5-10 years, 9.25 per cent for 10-20 years and 9.5 per cent for above 20 years for Rs 20 lakh linked to its base rate.

Union Bank has set its floating rate loans up to Rs 30 lakh at 8.5 per cent for a 5-year loan (base rate plus 0.5 per cent), it is 8.75 per cent for loans of 5-15 years and 9 per cent for 15-20 years. IDBI Bank under the new regime is offering floating rate loan of up to Rs 20 lakhs at 8.5 per cent, Rs 20-30 lakhs 8.75 per cent, Rs 30-50 lakhs 9 per cent and above Rs 50 lakhs is 9.25 per cent.

CS Jain, head, personal banking, IDBI Bank said, customers should decide whether they want to move their loans to the base rate system, especially as it is more stable.

Jain said, “Customers would now have to decide whether to exercise the option provided by the RBI. This system is theoretically less prone to fluctuations when compared to the PLR system where banks keep adjusting rates frequently.”

Kamath added PNB will review its base rate quarterly. He said, “Our base rate would be reviewed after every quarter. One of the inputs towards this will be our cost of deposits. We have also raised our deposit rates by matching amount to give our customers a fair deal.”

According to Ashish Jindal, regional director (north), Knight Frank India for home loan borrower’s base rate is more beneficial.

He said, “I feel that borrowers would be better off under a more transparent base rate system. The previous system was anything but transparent where the benefits were often not passed on to the borrowers.”