If you are looking for a home loan, this is the right time to get one.A new system for interest rates will kick in on Thursday, which will be transparent, called the `base rate' system. This will serve as the minimum rate for all loans and will be calculated on the cost of deposits, the banks' administrative and operational costs and statutory costs.
This will also most likely end the practice of offering loans to new customers at lower rates than those prevailing for the first couple of years. This prac- tice is seen as discriminatory against existing customers, whose benefits are actually being passed on to lure and lock in new customers.
The base rate system will replace the existing benchmark prime lending rate that was prone to arbitrariness in charg- ing of interest rates.
Banks will have to provide information on the actual minimum and maximum lending rates charged to major categories of borrowers on a quarterly basis under a formula specified by Reserve Bank of India.
BASICS OF BASE RATE
- What is base rate?
Transparent system to fix interest rates for borrowers, will serve as the minimum rate for all loans.
- What is it replacing?
The benchmark prime lending rate (BPLR), which is seen as arbitrary in charging different rates from existing and new customers.
- How will it be calculated?
Each bank will fix its own rate, based on costs of deposits and other costs and will be the minimum rate for each bank.
- How often will this rate be changed?
Every 3 months.
- Have banks fixed base rates?
SBI has, at 7.5 per cent; PNB, Indian Bank, Union Bank at 8 per cent. Others will announce by Wednesday, in the range of 6.75 to 8 per cent.
- Will interest rates rise?
Experts say likely for corporates; no major change for home loans.
- What should existing customers do?
Either re-negotiate or move to a new bank that offers the new base rate system.
- Will deposit rates be affected by this change?
State Bank of India (SBI) set the tone for the new base rate system for deposits and loans on Tuesday with a benchmark rate of 7.5 per cent, as the country prepared to usher in a new system of deter- mining interest rates.Three other public sector banks (PSBs), Central Bank of India, the Union Bank of India and Punjab National Bank set their base rates at 8 per cent.
The country's largest commercial bank said it will announce its new loan rates for new customers on Wednesday, one day before the formal start of the new lending rate regime that follows the Reserve Bank of India's mandate to banks that demands a transparent frame- work in which the creditwor- thiness of borrowers and the risk appetite of lenders will determine the rates.
SBI clarified that the existing retail customers (who have a home loan or an auto loan going) will see no change in their interest rates because of the change in regime.
On the ground SBI expects minor changes in lending rates, which have thus far been determined with respect to the Benchmark Prime Lending Rate (BPLR). A key difference is that borrowers could earlier get discounts to the BPLR. In the new system, the base rate will serve as the floor.
“According to the calculation we have done so far, we may see a change of around 25 basis points (0.25 percentage point) on either sides in our various lending rates,“ said O.P. Bhatt, chairman, SBI.
ICICI Bank, HDFC Bank, Axis Bank and others will announce their base rate on Wednesday and their bench- marks are expected in the range of 6.75 to 8 per cent.
“Most players in the banking sector are expected to fix the base rate between 6.75 and 8 per cent,“ said Paresh Sukthankar, executive director, HDFC Bank.
While experts say that corporate borrowers may see a rise in their borrowing costs because of the base rate system coming in place, SBI feels that it will not create an impact on its business.
“There will be no significant adverse impact on our corporate lending portfolio as only 3 per cent of our corporate loans are priced below the base rate,“ said Bhatt.
SBI also expects no impact on profitability as its net inter- est margin will not be impacted by the advent of base rates.