Demystifying PLR Rates in Home Loan Lending

Nowadays, home loans are one of the most popular credit options among people for fulfilling the desire for a dream home. The interest rate offered by a bank or financial institution acts as a deciding factor for most borrowers. There are two types of interest rates for home loans- fixed rate and floating rate. With the latter, lenders follow the repo rate or the prime lending rate (PLR rate) to decide the interest rate.

Here in this article, we have tried to demystify PLR rates and bring clarity for readers availing a home loan.

What is a prime lending rate (PLR)?

The prime lending rate, also referred to as the prime rate, is an internal rate framed by NBFCs and banks to determine the floating rate of interest for credit facilities such as home loans and loans against property.

While setting up a prime lending rate a financial institution takes into consideration several aspects like risk involved in lending, volatility and fluctuations in the economy and markets. Over the years, several prime lending rates have been introduced in India. This includes the benchmark prime lending rates (BLPR), base rate and Marginal Cost of Funds Based Lending Rates (MCLR).

The PLR rate varies from one financial institution to another and for borrowers with different credit scores.

Key features of prime lending rate

Here are some of the key features of prime lending rates:

  1. An increase in lenders’ prime lending rate leads to higher costs for small businesses, car loans, and mortgages.
  2. Changes in prime lending rates can also influence the variable interest rate.
  3. The prime lending rate is typically available to customers with good credit profiles as they are less likely to default on loan repayments. These customers can avail home loans at lower interest rates.
  4. Although individual customers may not have access to the prime lending rate anymore, it may be still available to corporates and larger businesses.

PLR vs MCLR vs repo rate

Often there is confusion between prime lending rates (PLR rate), Marginal Cost of Fund-Based Lending Rates (MCLR) and the repo rate. Listed below is a brief comparison between these three terms.

  • Meaning: PLR is a rate of interest at which the majority of financial institutions lend money to their most creditworthy customers. MCLR is the minimum rate of interest that a financial institution can charge on a loan based on the marginal cost of funds. 

However, the repo rate is the rate at which India’s central bank, Reserve Bank of India (RBI) lends money to commercial banks. Based on this rate, many financial institutions provide floating home loan interest rates to their customers.

  • Review frequency: Banks and NBFCs set their own prime lending rate; hence the frequency of review varies from lender to lender. However, lenders usually revise the Marginal Cost of Funds based Lending Rate (MCLR) over a time frame of 6 to 12 months. India’s central bank, RBI reviews the repo rate on a regular basis and revises it once in a quarter, once in six months, or more.
  • Transparency: There is a lack of transparency in determining a financial institution’s prime lending rate as it is set at its own discretion. Lenders may choose not to disclose some of the crucial components in it. In contrast, MCLR and the repo rate are considered to be more transparent as lenders have to publicly disclose these rates.
  • Calculation: PLR is a rate of interest which is determined and framed by financial institutions themselves. While MCLR is a rate of interest rate which is calculated based on the marginal cost of funds and other factors. On the other hand, the repo rate is the rate of interest which is decided by India’s central bank.

Factors affecting prime lending rates (PLR)

Here are some of the factors influencing the PLR rate offered by financial institutions:

Base rate: The term base rate refers to the minimum rate of interest at which financial institutions can lend money. Lenders have got full freedom to decide their base rate which cannot be lower than the one prescribed by the Reserve Bank of India.

Internal factors: Lenders consider several internal factors while framing their PLR rates. Some of these include: cost of funds, administrative expenses, risk premium, and desired profit margin. Alterations in these factors can lead to a change in their prime lending rates.

External factors: Lenders take some external factors into consideration. Some of these factors include prevailing market conditions, inflation rate, economic growth, and the monetary policy established by the Reserve Bank of India (RBI). Any changes in these external factors can impact a lender’s prime lending rate.

Credit profile of borrowers: Lenders also take into account the creditworthiness of loan applicants. Key aspects like good credit score, credit history, income, and employment status can influence the PLR rate. While borrowers with a favourable credit profile may receive lower PLR rates compared to individuals with poor credit scores.

 Impact of Creditworthiness on PLR

Lending institutions assess borrowers’ credit scores before granting them loans. Usually, NBFCs and banks determine the actual cost of a loan from an individual’s creditworthiness and the credit risk premium associated with it. 

Lenders determine the creditworthiness of a borrower based on the individual’s past repayment behaviour and credit history. In case a borrower has a healthy repayment history, he/she will get access to better lending terms, including a lower interest rate and higher loan eligibility. The prime lending rate is the rate offered to such applicants.

Many financial institutions also provide pre-approved offers to customers with high credit scores. These offers are provided for a range of financial products like home loans, loans against property, business loans, etc. One can check his/her eligibility for such offers by providing some basic information.

The current prime lending rates in a country play a crucial role in assessing its economy. Fluctuations in the prime lending rate determine economic conditions. On the other hand, large business institutions can influence a bank/NBFC’s PLR rates whenever a big corporation establishes itself as the most creditworthy customer. The PLR tends to decrease due to their consistent debt repayment without defaults and vice versa.

Knowing the PLR rate makes the borrowing and lending process smooth and convenient. It is essential for borrowers to have an overall understanding of the factors that impact interest rates like PLR. Moreover, loan applicants should take measures like improving their credit score and salary before applying for a loan.

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