Floating Home Loans Never Seem to Dwindle

A benchmark of a floating loan rises and falls according to the funds of the country. Benchmarks loose their importance in India because the organized institutions profit from and exploit the financial illiteracy of the retail client.

A good benchmark has to be independent. A benchmark is a rate that is functions as a yardstick to either evaluate a performance or set some other linked rates in the market. It implies the person measuring performance should not be influencing it in any way. Therefore the mutual fund rules have to be independent with a determined benchmark.

Where as for home loans, the banks themselves fix the benchmark. This ensures them to revise the benchmark at their own will, and when the old ones go away to subsequently introduce the new ones. For example, ICICI Bank has two benchmarks in operation. . Borrowers till early 2004 are on what is called the Internal Retail PLR (or RPLR) and those after that are on Floating Reference Rate (FRR). This, in early 2004, was set 2 per cent lower than RPLR, at 7.75 per cent

The bank preferred to launch a new benchmark that was much lower instead of reducing the old one. This very procedure was done in lieu of passing on the benefit of the falling rates in 2004. Since the old customers thought their rates would float down, continued to pay defeating the purpose of being a 'floater', and the new customers got a market benchmarked at a competitive rate.

Today these benchmarks are at 10.25 per cent for FRR and 12.25 per cent for RPLR. In India the only banks that that tried out independent benchmarks were ING Vysya and Kotak Mahindra Bank, and this October both withdrew these. For Kotak Mahindra Bank, the benchmark was its own one-year fixed deposit rate, along with a regular PLR-based (internally fixed) rate.

Mid October , the FD - linked rate was recalled. It is the FD- linked rate that really reflects the cost of funds because a hike in the FD rate would mean that the bankl would have to pay its lenders a much higher rate as well.

The three month FIMMDA-NSE was used by ING Vysya bank, which was the Mumbai Inter-bank offer rate {Mibor} index that was operated by the National Stock Exchange. This is as independent as a benchmark can get and most countries use a similar inter bank rate as a measuring rod.

Rates not being constant for example, Mibor rates have ranged from a low of 5.51 per cent in January 2005 to a high of 8.63 per cent in March 2006, and are ruling at 7.48 per cent today. A loan at Mibor plus 2 could have moved from a high of 10.63 per cent to a low of 7.51 per cent over this time period without the bank being able to influence its movement - of it being up or down.

In India the only truly transparent benchmark was discarded even before it could become the industry standard, which has been a great disappointment. Now, the market is without any independently fixed home loan benchmark. Either RBI can make it mandatory for banks to disclose transparently their benchmarks like banks in Australia. Or, the RBI can make it mandatory for banks to fix home loans to an independent benchmark.

The loan has to be carefully looked in as to where it's benchmarked to and to be equally involved with the banking business if you are not satisfied with the way the bank works with its benchmark.

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