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Playing the base rate game

Whether your loan is linked to base rate or BPLR, a lower rate is yours only if you ask for it

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Two years back when the Reserve Bank of India introduced the as the benchmark for banks to calculate all lending rates, it was projected as the panacea for all ills. When compared to the Benchmark Prime Lending, the base rate promised transparency, faster transmission of any rate action by the central bank and uniformity for customers. But has the base rate served its purpose?

The biggest difference between the two is that in case of BPLR, the lending rate for the borrower was calculated as either '+' or BPLR '-' depending on the kind of borrower (retail; large corporate, small or mid-corporate) and kind of loan (secured or unsecured). Since, BPLR was only indicative, it was possible for banks to offer 'good' customers loans below the BPLR. However, in case of base rate, banks cannot lend below the base rate. Hence, all loan rates (except loans subsidised by the government), are marked over the base rate.

Currently, most banks' base rate are about 400-500 basis points lower than their BPLRs. For instance, in case of SBI, the BPLR is 14.5 per cent and base rate is 9.75 per cent. So, a rate that is about 600-700 bps over the base rate would work out to be roughly the same as 100-150 bps over the BPLR.

“A customer may prefer BPLR over base rate only because the mark up over the rate is lower, though in reality the final rate may be same. Even we do not really discourage the customer. Those customers who knew the intricacies of the older BPLR regime will ask for details of the base rate and try to understand it. But most customers only ask for the final rate,'' said a senior official of a public sector bank.

According to V N Kulkarni, debt counselor with Abhay, when the base rate was introduced, the aim was to have different benchmark rates for different products. But that has not happened and housing loan customers who have taken loans under BPLR are still paying higher rates. “Ideally, when banks moved to base rate, they should charge customers- whether old or new- the same rate. But that has not happened because banks' say that their asset liability management will go for a toss,'' he says. However, as says R K Bansal, executive director, IDBI Bank. points out customers can move to the newer and lower rates by paying some commission or fees. “Anyway, with no penalty on pre-payment customers have the power to move to other banks. Customers must remember that no bank will reduce the rates for their entire portfolio. It is the customer who has to be alert and ask for the lower rate,'' he says.

So, ask and you shall receive. This applies to everything, including lower loan rates.

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