Benchmark Prime Lending Rate

Description

Benchmark Prime Lending Rate

Many terms in finance and banking can feel intimidating to read. One of these might be the Benchmark Prime Lending Rate or BPLR for short. All these words may feel confusing, but they impact many people, specifically those borrowing money from the bank. It is therefore quite important that one apprehends how BPLR is, what it does, and why it matters.

BPLR

Borrowers with a good credit score will be offered loans at the prevailing BPLR. This is because by offering credit to those consumers with a good credit history at the lowest rate possible, this rate becomes the BPLR.

Prime borrowers are defined as those whose probability of default is zero. Since such borrowers are so rare, the whole purpose of BPLR was a mere theoretical exercise.

RBI introduced BPLR to simplify the structure of the Indian interest rate regime. Prior to the introduction of BPLR, banks disclosed their methodology for determining interest rates to the public very infrequently. The BPLR was intended to be a reference rate to be adhered to by all banks in order to lend transparency and fairness to the lending process. But BPLR had certain deficiencies over time.

How BPLR operates?

Following is the formula according to which a bank will assess where interest rates for loans are to be pegged at:

Loan Interest Rate = BPLR + Spread (or Margin)

For example:

Assume:

BPLR for banks stands at 10%
The add-on by the bank as a risk or cost margin is 2%

Therefore, the interest rate on your loan is 10% plus 2%, which is 12%.

High credit scores and a good payment history lead to a shrinking margin. This is why big corporations get loans that are very close to the BPLR.

BPLR’s

To attract corporate clients, Banks started giving loans that were less than the BPLR. This made things foggy and unfair, especially to small borrowers and retail customers.
BPLR began to lose its sense because of these.

Some of the major issues were:
Open

Subtlety in stating the prices of financial products, specifically the existing full range of borrowing rates.

What replaced BPLR?

The Reserve Bank of India came up with new mechanisms because the older ones were not so efficient.

Base Rate (2010): ‘Base Rate’ Replace BPLR, More Transparent Regime All loans are to be tagged with the new Base Rate.

Calibre of Setting Interest Rates: The Marginal Cost of Funds Based Lending Rate (MCLR) (2016) is a more sophisticated way to determine interest rates because it reflects the cost to the bank of raising resources to lend.

External Benchmark Lending Rate (EBLR) (2019): Presently most of the retail loans like home loans, car loans etc. are linked to some external benchmark and in short the Repo Rate of the RBI, or the rate on government treasury bills

These changes were made to make things clearer, more transparent, and ensure the process of communication of rate changes from the RBI to the customer is expedited.

Is BPLR still around?

Yes, BPLR is still in existence. It is applicable to some older loans that were taken before April 1, 2010, when the Base Rate system set in. Such loans have been christened legacy loans.

So, if you have any of these kinds of loans, ask your bank to convert it to the new interest rate system, like MCLR or ELBR – it may get you better rates.

BPLR isn’t a rate that’s used for most loans now but having a knowledge of it would show you how loan interest rates have evolved in India plus how exactly your interest rates were set by banks.

For businesses and professionals in finance, knowing what BPLR is can help you compare different loan options, especially if you have older contracts.

All these are BPLR, Base Rate, MCLR, and EBLR. BPLR Base Rate MCLR EBLR (from 2003 up to date)

Implemented in 2003 2010 2016 2019
Transparency level: Low More High Very High
Loans Internal benchmark External benchmark External benchmark Internal benchmark of marginal cost with risk perception
Applicability Retained for some old loans For some old loans Yes (limited) Yes (most retail loans)

BPLR used to form an integral part of the Indian banking system.

It was supposed to make things transparent, but several issues were tied to it, which led to the evolution of better systems like MCLR and EBLR.

Even if BPLR is mostly the benchmark for new loans, albeit not now in use, comprehending its actual functioning will enlighten a person on how banking interest rates have evolved. If one has an old loan that is under BPLR, they should speak with their bank to shift them to a plan with a better current interest rate. Financial literacy helps you save and borrow wisely in today’s world.