Housing Finance Companies (HFCs) are regulated by the National Housing Bank Limited (NHB), a subsidiary of the RBI. The funding of housing finance companies, is different from those of banks. So, the basis of charging interest on home loans granted by housing finance companies, is also different from the one adopted by banks. These companies base their actual lending rates against a benchmark rate, which is called Benchmark Prime Lending Rate (BPLR).
Interest rates for all the loans are calculated with reference to this rate. This is generally the highest rate that the housing finance company charges. So, a majority of the home loans, are given at a rate that is below this PLR.
Basis of home loan interest rates of banks
Earlier, banks also used to give home loans on the basis of the PLR. From July 2010, the RBI introduced the concept of a ‘base rate’, for computing the lending rates – a rate below which the banks were not allowed to lend even to the best of the borrowers. The purpose of introducing the base rate, was to bring transparency in the transactions and to ensure that the banks pass on the reduction in repo rate to the customers, quicker than what was happening under the PLR regime.
The first purpose was served, as the base rate served as the bottom rate. Consequently, borrowers knew exactly what premium they were paying, over the best of the customers who could get the home loan at the base rate.
The banks are supposed to work out the marginal cost of fund-based lending rates for different tenures, like overnight, one month, three months, six months and 12 months, unlike the base rate, which was used for lending by the banks for different tenures, without looking at the corresponding borrowing based on tenure.