The Indian home loan market, bedazzled by the low rate home loans, forgot to ask one basic question: what is my floating rate loan benchmarked to?
A floating rate loan is one, which is pegged to a rate and should rise and fall with the benchmark, according to the rise and fall of the cost of funds in the country. So far so good, but the most obvious things break down in India because the organised institutions profit from and exploit the financial illiteracy of the retail customer. Here is how benchmarks lose relevance in India.
What is a benchmark? A benchmark is usually a rate that is used as a yardstick to either evaluate performance or set other linked rates in the market. For example, diversified equity funds use the Sensex as a reference point for their funds’ performance. A good benchmark, of course, needs to be independent.
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