Base rate system puts a question mark on home loans
By Joseph Samson
Mar 8, 2010
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The new interest rate system adopted by the RBI as base rate system has put commercial banks in concern. These banks are now seeking clarifications regarding exclusion of home loan pricing from the base rate system.

Ever since the idea of propagating the base rate system has been adopted by the RBI, the commercial banks are in a dilemma regarding various aspects of home loan. They have been in talks with RBI regarding this since quite some time. Earlier the banks were in talks with RBI regarding pricing of old home loans as loans already given for 15-20 years do not have any provision for change in their interest rates.

The expected base rate for most banks is to be in the range of 8.5 to 9.5%. If base rate lies in this range then home loan rates would be as high as 10 % and above. This would make homes very costly for the common man. Presently, home loans are available at 8.5%.

Bankers insist that home loan is one such loan that must be kept affordable for people.

The chairman of a public sector bank said, "Though most concerns over the implementation of the new system have been addressed by the Reserve Bank of India, certain more clarifications are awaited."

Banks agree that teaser rates to allure more customers towards taking loans should be discontinued but also insist that application of base rate system for home loan pricing is also not acceptable.

"Affordable housing is an important issue and we are yet to get clarification from the central bank if home loans would also be linked to the base rate," said M S Sundara Rajan, chairman and managing director, Indian Bank.

The bankers had last week approached RBI to postpone the incorporation of base rate system from 1 April 2010, following which the new date has been set as 1 July 2010. The bankers had also sought permission not to include sanctioning of loans to employees as per base rate system.

The RBI has taken this directive to switch to the base rate system of lending from BPLR system so as to bring about transparency in the loan pricing mechanism of commercial banks.


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