Base rate system good for realty

The RBI’s policy, of moving the banking system away from BPLR to the ‘base rate’ system, is expected to have a positive impact on the overall debt markets, in terms of transparency and competitiveness. Since current home loan rates are already around the 8-9% mark, which is close to the base rates announced by banks, the immediate impact for new loans will be negligible.

However, it is recommended that home mortgage borrowers on a floating rate system, move to the base rate system on their current outstanding obligations, especially if the loan is relatively new. The BPLRs were as high as 16-17% and older floating rate loans were inching towards 12-13%. Now, consumers will be able to choose their mortgage banks based on their competitiveness, rather than an arbitrary and opaque BPLR system. This should bring more consumers to the market, thereby pushing up volumes in residential sales.

The system will also do away with the artificial home loan price wars, based on an initial low fixed rate and a high variable floating rate. The credit merit of each consumer will be the only consideration on the rate movement, apart from larger debt market systematic risk. Several banks are yet to fully absorb the impact of the base rate system on their lending portfolio and new applications.

Consequently, not all banks have declared their base rates. Within real estate, the base rate system could bring renewed consumer interest across all markets, since new loans will have more predictable EMIs and old loans can get restructured, freeing up cash for newer property purchases.

(The writer, Amit Goenka, is national director - capital transactions, Knight Frank India)