What are BPLR and MCLR, and how do they impact your home loan rates?

 If you are planning to take a home loan from a bank, BPLR and MCLR are some of the terms you would come across. What are BPLR and MCLR and how do they impact home loan rates? Let's take a look

The rate-setting method by Indian banks on home loans has evolved over the years. Let's start with BPLR.

What is BPLR?
The rate at which commercial banks charge their customers who are most credit worthy

The Benchmark Prime Lending Rate or BPLR was introduced by the Reserve Bank in 2003. It is the rate applied by a bank to its most creditworthy customers. But the major problem with BPLR was lack of transparency. Banks could lend below the BPLR to privileged customers.
So, in 2010, the Reserve Bank of India introduced the Base Rate system, which replaced the BPLR system. It was used as the benchmark rate by banks for lending till June 2010. Currently, the housing finance companies lend at retail prime lending rate, which is similar to BPLR.

What is the base rate system?
Banks were not permitted to resort to any lending below this benchmark
Banks were required to review the Base Rate at least once in a quarter

Base Rate is linked to...
Cost of fund
Unallocated cost of resources
Return on net worth

According to the RBI, banks can fix the BPLR with the approval of their Boards. The base rate is linked to the cost of raising funds, unallocated cost of resources and return on net worth.
Banks are allowed to determine their actual lending rates on loans and advances with reference to the Base Rate and by including such other customer-specific charges as considered appropriate.

Now, whenever RBI changes the Repo Rate under Base Rate, the changes in interest rate are not automatically transferred to borrowers.