Indian home loans float only in one direction—up. Successive Reserve Bank of India (RBI) governors have tried to use a mix of benchmarks, moral-suation and nudges to get the banks to be fair to a set of borrowers who now account for a large part of the banks’ loan books, but loan rates have remained sticky at higher levels. As borrowers, we know the pain of having a loan that gets very quickly revised upwards when the policy rate rises, but stays high when the policy rates fall. Banks have managed to manage all benchmarks tried out every few years by RBI. The BPLR, base rate and the MCLR are the various benchmarks (read about these here) tried out over the past. Each time a new benchmark was introduced, RBI expected banks to pass on the rate cuts, but each time it failed.
We know anecdotally that floater rate home mortgages are sticky when they are high and rise quickly when they are low. Therefore, when I got a letter from my home loan vendor telling me that the company had generously reduced the benchmark rate by 0.05% last week, reducing in three digits what I will pay less over the rest of the loan tenor, I was surprised. Over the years, I’ve become used to letters from the home finance company raising rates—sometimes by 25 basis points, sometimes by 50 basis points—making this reduction something unusual. (One basis point is one-hundredth of a percentage point.) I’m stuck (for a variety of reasons) in a home loan that the bank vended, but then passed on to its home finance company. That is a problem because banks now have to use the base rate as a benchmark for all products and not the earlier Benchmark Prime Lending Rate (BPLR). The misuse of BPLR had nudged the Reserve Bank of India (RBI) to force banks to switch over to a base rate system in April 2010. The home finance companies, however, are not obliged to follow the base rate system and continue with home loans pegged to their own BPLR. Blogger Deepak Shenoy has a good piece on this (here: http://mintne.ws/1JJCSxQ ), where he says that some banks pass on their loans to sister home finance companies, thus managing to side-step the base rate-linked loans and staying with a benchmark they fully control. But five years into the base rate system and one full rate cycle later, it seems that even the move to a base rate system has not worked in rate transmission as far are retail borrowers are concerned.
here is a famous saying: you count hours and days, while the years just fly by. This looks certainly true of changes in the road rules around banking, insurance and mutual fund products in the year gone by in the world’s second fastest growing economy. It takes a sweeping look at the past 12 months to realize the magnitude of what just happened, whereas tracking each change as it happened was just one more story to be reported on. Now that the dust-up between regulators is over, at least for the time being, it’s a good time to take stock of the changes and what they mean for our money lives.
The year saw two major changes in banking as the regulator, the Reserve Bank of India (RBI), made significant changes to make our savings earn more and loans cost less. From 1 April, a new formula that calculates interest on money in the savings account has come into effect.
What if a kilogram was a variable? Or a kilometre? How’d you react if the vendor was free to decide what a kg would measure today? The vendor could then choose to give you five mangoes a kg when he bought mangoes at Rs25 a kg, he could define a kilogram such that you got just four when the price he faced went up to Rs30 a kg. And if prices fell to Rs10 a kg, he had the power to define the kilogram at five mangoes a kg.