Five years into the base rate system, it seems that even the move to a base rate system has not worked in rate transmission
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.