ATM :: Why shifting your home loan from BPLR to base rate is beneficial

Khyati Dharamsi, ET Bureau Jul 11, 2011, 03.17am IST


In 2004, Delhi-based Radhakrishnan Nair took a home loan of `7.28 lakh from a private sector bank at 7.5%, even as other nationalised banks were offering higher rates. Today, the same bank is charging him 14.75%. More importantly, the loan that should have been repaid by the time he retires eight years from now has been extended by 21 years.

Nair is not alone. There are many like him whose home loan rates have shot up to 15% what with the rates rising for the third time since the start of this financial year. Such people could benefit by shifting from the BPLR or the benchmark prime lending rate to the base rate. How?

How will shifting help?

If you had applied for a home loan before 1 July last year and it hasn’t been renewed since then, in all likelihood, the interest on your loan is still based on BPLR. It has now been a year since the Reserve Bank of India directed banks to move from the BPLR to base rate as the benchmark interest rate for loans granted after 1 July. No banks are allowed to lend below this base rate.

“If you have taken a loan just after 1 July, ensure that your bank has linked your rate to the base rate. This is applicable for clients who have borrowed before 1 July,” suggests Vipul Patel, director, Home Loan Advisors, an independent mortgage consultancy. While borrowers may not find immediate relief in shifting to the base rate, they can benefit later when the rates start to drop because these will fall faster than those linked to the BPLR.

This is because base rate is more transparent then BPLR. If the interest rates fall, banks will have to lower the base rate, which is a function of the cost of funds in the market. As all the variable rates of interest are pegged to the base rate, the borrowers will gain from any cut in this rate. Hence, it is advisable to opt for it. “If you are one of the old borrowers who had taken a loan around 2006, right now you might be paying 13-14% on your home loan. There may not be an immediate benefit on interest rate, but you will get on to a system that is more transparent,” says Harsh Roongta, chief executive officer at

What if rates don’t reduce immediately?

If your home loan rate doesn’t come down immediately after shifting to the base rate, don’t worry. It will the moment the RBI decides to reduce rates. However, the BPLR linked home loan rate may not fall. “Under the benchmark prime lending rate, banks increase these when the rates are going up, but do not reduce these when they go down. Also, the differential treatment given to old borrowers vis-a-vis new borrowers will be reduced under the base rate scenario,” says Roongta.

“Since the introduction of the base rate, the rates have been consistently rising and, hence, it is difficult to gauge and give a practical instance of benefits derived by consumer on account of the base rate. Assuming the banks will adopt the same policy and pass on the benefits of softening of credit/monetary policy, the base rate regime may prove beneficial to consumers,” adds Patel.

But why is it that when there is an increase, both the rates increase, but in the case of reduction in rates, they don’t do so simultaneously? RK Bansal, executive director at IDBI Bank, explains, “Both the rates are the same, but it is a question of which will move first. Base rate will lead to a faster reduction in loan rates when the rates are going down than the benchmark prime lending rate. There is a 2-3 month lag as the base rate is linked to marginal cost and BPLR is linked to average cost.”

The real reason, according to an expert, is that “BPLR was market-driven and competitive forces had forced the pricing of a significant proportion of loans out of alignment with BPLRs and in a non-transparent manner”.

Shifting to the base rate will make sure that when the rates come down, the interest portion of your EMI comes down in tandem with it. What is the procedure? How do you shift from BPLR to the base rate? You can simply request your bank to provide you the facility and it cannot deny it to you. Banks just need a letter from the borrower, saying that he wants to shift to this new rate. “Every customer has the right to shift to base rate. There is no complicated procedure involved,” says Bansal.

However, note that no bank is allowed to charge you a fee to shift from BPLR to the base rate. Anticipating the demand from customers to shift, some banks have introduced a form, which would have to be filled. “There is a request form, which the customer needs to sign and request for the change. After submission of the form, the change is made in the system within three working days,” says Sonalee Panda, head, marketing and product, ING Vysya Bank.

If you have a home loan offered by a housing finance company, such as HDFC and LIC Housing Finance, or have taken it from banks that partner with housing finance companies, such as IndusInd Bank and HDFC Bank, then you would not be able to shift to the base rate. This is because the base rate system is applicable only to the banks that are governed by the RBI, while HDFC, LIC Housing Finance, etc, are regulated by the National Housing Board, which still operates on the BPLR system.

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