Retail Prime Lending Rate
- May 2, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Retail Prime Lending Rate
Subject: Economy
Section: Monetary policy
Why in the news?
HDFC increases its Retail Prime Lending Rate (RPLR) on Housing loans, on which its adjustable rate home loans (ARHL) are benchmarked, by 5 basis points, with effect from May 1, 2022
Concept:
In India, the PLR is the rate on which commercial banks lend to their most trustworthy and creditworthy customers.
RBI does not decide the PLR of NBFCs or Housing finance institutions. RBI only announces the Repo rate which affects the cost of raising new funds for housing finance companies. Effective 1st april 2016, banks have been directed by the RBI to fix their loan interest rates benchmark to MCLR rate. However, HFC and NBFcs continue to offer loans at PLR rates.
Currently, all commercial banks have the authority to set their own benchmark prime lending rate (BPLR) with the sanction of their respective boards. The prime lending rate is crucial for borrowers, as the PLR directly affects the lending rates for a home loan.
The prime lending rate is the primary determiner of most of the interest rates charged by the lending institution; it is a component of the rate charged to the customer.
INTEREST RATES = SPREAD + PRIME LENDING RATE
The spread component is either positive or negative and remains constant throughout the tenure of the loan. Any change in PLR affects the Floating Rate of Interest only. In India, most loans have a fixed rate of interest, except home loans. So changes in PLR don’t affect the majority of loans; however, home loans with floating interest rates are dependent on the PLR.
| BPLR vs Base rate vs MCLR: Benchmark Prime Lending Rate or BPLR was introduced by the Reserve Bank in 2003. It is the rate applied by a bank to its most creditworthy customers. But the major problem with BPLR was lack of transparency. Banks could lend below the BPLR to privileged customers. All commercial banks have the authority to set their own benchmark prime lending rate (BPLR) with the sanction of their respective boards. So, in 2010, the Reserve Bank of India introduced the Base Rate system, which replaced the BPLR system. Currently, the housing finance companies lend at retail prime lending rate, which is similar to BPLR. Base rate system?
Base Rate is linked to:
MCLR system: Banks were allowed to determine their actual lending rates on loans and advances with reference to the Base Rate and by including such other customer-specific charges as considered appropriate. Now, whenever RBI changes the Repo Rate under Base Rate, the changes in interest rate are not automatically transferred to borrowers. Therefore, in April 2016, the RBI introduced MCLR to tackle problems related to the Base rate regime. Banks stopped lending on base rate from April 2016. But, loans taken between June 2010 and April 2016 from banks remained on the base rate mechanism. What is MCLR?
The main aspects while calculating MCLR:
The MCLR is determined by the current cost of funds, in contrast to the base rate, which is governed by the average cost of funds. It also provides transparency in the procedure followed by banks to arrive at interest rates on advances. MCLR is considered better in all respects because rates based on this system are more receptive to the changes in the policy rate. Any change in the Repo Rate is reflected almost immediately. This also ensures that the country’s monetary policy is implemented effectively across all spheres. Now, if you are planning to take a loan from a bank on a floating rate to buy a house, it will be linked to MCLR. And remember, you always have the option to convert your loans from base rate to MCLR. |