Base Rate v/s Bank Prime Lending Rate

Many a times people are not aware of Base rate & Bank Prime Lending Rate while deciding their loan. What do these rates mean? What is it’s impact on their personal loan? Which is good or bad from the two? In this article I’m trying to differentiate between the two rates.

What is Base rate (BR)?

Base rate is the interest rate below which a bank operating in India can not provide loan unless any specific instruction is given by RBI or Govt. of India. It’s the minimum rate of Interest allowed to charge from the borrowers of the bank.

What is Bank Prime Lending Rate (BPLR)?

BPLR is the rate at which, a Bank is willing to lend to it’s most trustworthy, low risk customer. However often banks lend at rates far below this BPLR. For example, most home loan rates are at sub-BPLR levels. Some large corporates also get loans at rates substantially lower than BPLR. For all banks, BR will be much lower than their BPLR.

The Pain of BPLR?

Earlier almost all banks were adopting a common practice of increasing the BPLR when the over all interest rates in the economy are inching up but when the reverse was happening e.g. interest rates were coming down, the reduction in BPLR was either not done at all or not regularly. Instead of reducing the BPLR, the banks were ready to offer a higher spread (difference from BPLR) to it’s new customers (Mainly home loan customers). this was creating a lot of pain & unfair disadvantage to old customers as their loans were running on higher rates due to lower spread from BPLR & thus were not getting the benefit of low interest rates. To control these malpractices of banks, RBI came forward for the rescue of helpless home loan customers.

RBI Introduced Base Rate & made it compulsory for all banks to offer all new loans to be linked to Base  Rate from 1st July 2010. Also to save old customers, the conversion from BPLR to Base Rate was allowed free of cost. RBI gave free hand to each bank to calculate & declare it’s own BR but it was a more transparent number than BPLR.

How often can a bank change its BR?

A bank can change its BR every quarter, and also during the quarter.

What does it mean for corporate borrowers?

Under the BPLR system, large corporates who enjoyed rates as low as 4-6% will be hit since from July 1 no bank can lend at rates below BR. However, there is a chance that some corporates, with low-risk profile, would get a lower rate under the new system as under the BR regime banks are expected to take into consideration the risk levels of the borrower.

What does it mean for retail customers?

The impact could be an increase or decrease of 25 basis points (100 basis points = 1%) compared to the current rate of interest they are enjoying. However, existing customers will not be impacted by this change.

What does it mean for the banks?

Banks’ net interest margin will be unaffected.

Can a customer move from the BPLR to BR regime before the expiry of the current BPLR-linked loan tenure?

Yes, RBI has mandated clearly that all old customers should be given the choice to move/switch to BR linking of their loans if they so desire. For customers, a shift before the expiry of the tenure of the existing loan will make sense only if the BR-linked interest rate is lower than the BPLR-linked rate.

Although here is one interesting thing, housing finance companies like HDFC, LICHFC, Indiabulls, Dewan etc. are still charging BPLR linked rates as these are governed by National Housing Bank & not by RBI. So in case you have taken your loan from one such housing finance company & not from a bank, this Base rate thing is not applicable to you.

 

So what are your views on this article? Please feel free to share your views, queries in the comment section below.

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13 Responses to Base Rate v/s Bank Prime Lending Rate

  1. Chetan says:

    Hello

    Great info..

    I have few options and would like to know which option is best.

    Option 1: Bank like Bank Of Baroda, is giving HL @10.25% and there is no BPLR in this. They are giving on base rate.
    Option 2: Bank like SBI is giving HL @ 10.15% and they have 0.15% as BPLR

    So which option should be considered depending up factors like interest rate, BPLR.

    Thanks
    Chetan

  2. Amit says:

    Dear Ashal,

    When I took a home loan from SBI a month back, the interest rate was 10.5%. SBI has reduced the interest rate for new customers to 10.15% recently. But, I see that the base rate itself has been reduced to 10% with a spread of 15 bps on SBI website. Then, why is the new reduced interest rate not applicable to existing customers?

    Thanks,
    Amit.

    • ashalanshu says:

      Dear Amit, as far as I know there is no news of Base rate reduction as of now. Actually Base rate was increased from 9.8 to 10% on 7th Nov 2013. Yes spread has been reduced for new customer recently.

      Thanks

      Ashal

  3. Rohit Sardana says:

    Great Article. Keep up the good work and help the community.

  4. Chandra says:

    I used to be overwhelmed by all those terms whenever I spoke to any officer from SBI. Now I can talk to them confidently. Thanks ashal. Now, is SBI Max gain linked to BR or BRLR ? Is it uniform to all existing customers or one has to specifically opt for BR or BPLR? Under the present scenario, which is better for max gain? Looking forward to your valued suggestion.
    Chandra Aiyangar

    • ashalanshu says:

      Dear Chandra, for loans disbursed before 1st July 2010, the BPLR is the benchmark & the borrower should asked at the loan serving branch for linking of Base Rate in place of BPLR.

      The new loans after 1st July 2010 are linked with Base Rate mandatorily. Interestingly even after linking of old loans to Base Rate, the Rate of Interest may not change. To get the change in actual interest rate of your loan, you need to pay conversion fee of 0.56% of your outstanding loan amount as on date. This fee is subject to revision time to time by SBI.

      Thanks

      Ashal

  5. Kapil Tiwari says:

    Another short and sweet but highly informative article from Ashal! Now I know! Since my interaction with AIFW, I’ve learnt so many things i was unaware of 🙂 It’s been back to school for me!

  6. bharat shah says:

    very informative article for me. thank you.,Ashal!

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