Sometimes, financial terms can be confusing, especially when you’re trying to understand things like interest rates for important choices like buying a house in India. Among all the key terms like repo rates, base rates, and MCLR, there’s one term that stands out: PLR.
This article will discuss PLR full form, meaning of this term, why it’s important, and help you see how it might impact your financial decisions.
Understanding PLR
PLR, or Prime Lending Rate is the interest rate at which commercial banks lend to their most credit-worthy customers. The bank’s internal committees usually set this rate, which could differ from one bank to another.
Before the advent of the base rate system, PLR was the standard used by banks in India to determine interest rates for borrowers. It was meant to bring transparency to the lending system. While PLR is set explicitly for top-tier customers, banks can and often do charge higher rates for customers with higher risk.
How PLR Affects Home Loan Rates:
How does PLR come into play when discussing home loan rates in India? Let’s have a look at it.
- Determination of Home Loan Rates: Before the Reserve Bank of India (RBI) introduced the base rate and MCLR systems, PLR was the benchmark for determining home loan interest rates. If the PLR went up, the home loan rates would usually follow suit, and vice versa.
For Example, If Priya took a home loan from her bank when the PLR was 10%, and the bank had a policy to charge home loans at PLR + 2%, she would be charged an interest rate of 12%. However, if the bank decided to increase its PLR to 11%, Priya’s new interest rate would become 13%.
- Shift from PLR: Given the opaque nature of PLR and its susceptibility to manipulation, the RBI moved to a more transparent system – the base rate. Later, the MCLR (Marginal Cost of Funds-based Lending Rate) system was introduced. While PLR is now obsolete for determining home loan rates in India, it still exists for some older loans taken before the shift to the base rate.
Comparison with CIBIL Score
Your CIBIL score plays a major role in determining your creditworthiness. How does it correlate with PLR? While PLR was a universal rate set for premium customers, individual rates for other borrowers were often determined by their creditworthiness, with the CIBIL score being a significant factor.
For Instance, Let’s take Ramesh, who approaches a bank for a loan. If his CIBIL score is stellar, he might get an interest rate closer to the PLR. But if it’s low, he might end up with an interest rate much higher than the PLR, reflecting the risk the bank perceives.
With the phasing out of PLR for determining most loan rates, your CIBIL score still holds immense significance in the MCLR or base rate systems, affecting your final rate.
PLR’s Impact on Savings and Investments
Higher PLR indicated a tightening of liquidity. It could mean higher returns on fixed deposits and other bank-related investment instruments for savers and investors.
Conversely, a lower PLR might result in diminished returns on such savings. Understanding PLR’s fluctuation offered a vantage point to anticipate market trends, enabling strategic decisions about where and when to invest or save.
Conclusion
Financial jargon can be confusing, especially when related with essential decisions like home loans. However, understanding PLR’s full form is necessary to make informed decisions. Though PLR isn’t directly affecting new borrowers today, knowing how it shaped the country’s home loan rates can give you a deeper understanding of the evolving financial landscape.