Base Rate vs. BPLR: What should you go for ?

It’s not that rare for people to notice the terms RPLR/BPLR vs. Base Rate. BPLR stands for Benchmark Prime Lending Rate and LPLR is Retail Prime Lending Rate. These terms are the determining factors when finalizing a home loan. Floating home loans are connected with base rate or with BPLR. Now it is quite obvious for a layman to question why can’t there be a single criterion to link floating home loans. This is because two different groups of Financial Corporations are providing the home loans (a) ICICI, Axis etc, (b) Home Finance Companies like HDFC, PNBHF etc.

The difference between Banks and HFC’s lies in the fact that, banks are governed by RBI, whereas HFCs are monitored by NHB (National Housing Bank). But there were numerous grievances among the customers  whose floating loan was linked to BPLR regarding the fact that some customers had to pay high interest relative to the others whereas the other prime complaint was that HFC’s are not showing enough transparency in the procedure. HCF’s were also reported to hike the BPLR when the Reserve Bank of India increased the key rates but when there was a subsequent drop in key rates, these institutions didn’t bother reducing the BPLR. These infuriated a lot of customers. Although the Banks and HFC’s came up with an explanation that BPLR is related to the average cost required to acquire the funds, the customers weren’t totally convinced.

To deal with this, RBI came up with a guideline that was brought into effect from July 01, 2011. The guideline issued stated that existing customers can shift from BPLR to Base Rate and the banks were directed not to charge any extra amount for this. Base rate is essentially the lowest amount of interest rate below which the banks can’t lend any money.

RBI too suggested about scrapping the BPLR system as it is essentially market driven and there are a lot of inconsistencies in the system.  Shifting to Base rate from BPLR will ensure that the part of your EMI which depends on the interests will come down in tandem with the rates. That is to say that when RBI reduces the interest rates, your EMI too will come down. Base rate is also related to the marginal cost rather than the BPLR which is based on average cost. So it goes without saying that if you have taken a floating home loan which is based on BPLR, it might be a wise idea to shift to base rate. Shifting is free of cost as banks or HFC’s won’t charge any additional amount of money from you. All you need to do is to fill up a prescribed request form or simply write a request letter and sign it. The bank would then make the change in 3-7 working days. It isn’t that complicated a procedure.

So by now it must be clear to you why Base rate if more beneficial from a lender’s point of view. It is more transparent system and allows you to pay less when the interest rates come down which was not the case with BPLR.

 

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