What Makes Historical LIBOR Rates Significant?

Financial institutions in London had an increasing demand for a benchmark for lending rates at the beginning of the nineteen eighties. This benchmark was specially needed to compute prices for financial items such as interest swaps and options. The British Bankers' Association (BBA) took responsibility in 1984 which then led to the dissemination of the first LIBOR interest rates. Historical LIBOR rates have been useful references or sources for LIBOR.

Today LIBOR is acknowledged worldwide as the most significant benchmark for short-term interest rates. It is also used in the professional financial markets as base rates for a huge number of financial items like the options, swaps and futures. In banks, they use LIBOR interest rates as the basis for deciding on savings, interest rates for loans and mortgages. Since LIBOR is widely accepted as the base rate for other items, historical LIBOR rates are now constantly being tracked by numerous professionals, individuals and businesses all over the world.

LIBOR is known as an average interest rate where carefully selected banks undergo a process of lending funds to each other. These selected banks are recognized as "panel banks". Each year the British Bankers' Association together with the Foreign Exchange and Money Markets Committee performs the process of selecting banks. A panel for each currency is made at which can be composed of eight to sixteen banks that are chosen to be delegates for the London money market. The basis for a bank's candidacy to be in the panel is its reputation, market volume and understanding of the currency.

When LIBOR was just starting, it was only published for three currencies which are the pound, Japanese yen and US dollar. As time passed by the currencies increased to a maximum of 16 where some of them combined with the Euro on 2000.

Since there are fifteen various maturity levels, then there are also fifteen various LIBOR rates. Fifteen Maturity levels wasn't always the case especially in 1998 where the shortest maturity was just one month. A one week rate was then added in the same year and it was only in 2001 when the two-week and overnight LIBOR rates were established.

As you come to understand how LIBOR works then you will know how significant Historical LIBOR rates are. Though these rates are positioned in the United Kingdom, a lot of consumers still require comprehension on the mechanics of LIBOR especially that it is accepted as a basis for many kinds of consumer loans.

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Banks to Do Away With Sub-PLR Rates - Home Loan Takers to Benefit

People who prefer to take home loans at floating rate of interest might get benefited if banks change the method of pricing such loans. But now the Reserve Bank of India (RBI) is planning to forbid the banks from lending below prime lending rate (PLR), the benchmark rate for all floating rate bank loans.

A decade ago banks had taken permission from the RBI to lend below the benchmark rate known as sub-PLR. The banks had argued that if they do not lend below PLR they would lose customers to mutual funds (also other lenders ready to invest in their short-term debt offering rates below PLR.)? Although RBI accepted bankers' argument, from long time it is being felt that the practice of lending loans below PLR is not transparent and not much effective change can be seen in policy interest rates across the banking system.

Therefore to review sub- PLR lending practice, RBI constituted a committee headed by executive director Deepak Mohanty. It has been observed that 75% of loans given by banks are at sub-PLR rates. Also there are possibilities that RBI might not completely forbid such loans. According to people closely watching the proposed development, banks might be permitted to quote sub-PLR rates only on short-term, or on loans given for less than one year.

In case RBI prohibits sub-PLR rates on all loans above a year, then home loans will be priced at PLR or above PLR. Thus banks would probably find it difficult to reduce rates only for new customers by varying the spread between their PLRs and lending rates. Spread is the difference between the BPLR (benchmark prime lending rate) and the loan interest rate. This can be " BPLR plus' x' or BPLR minus" x"

Today when banks reduce interest rates on home loans the benefit of the revised rates is given only to the new borrowers For instance, a bank whose PLR is 11.5% its one borrower is paying 12% on a floating rate loan while bank is offering a loan at 9% to a new borrower. This is because the old borrower's loan was fixed at a rate of PLR plus 50 basis points while the new borrower loan has been fixed at PLR minus 250 basis points. Thus the banks are playing with spread, which make old customers feel cheated.

After RBI puts a ban on lending below PLR and it is fixed as the floor rate, with the maximum rate capped at 400 basis points above PLR, then banks will not have much option to vary rates for old and new borrowers. Looking at this the large corporates would prefer to take short-term loans as they would be able to bargain for lower rates. On the other hand small to mid-size corporates might get benefitted the most as fixing PLR as the floor rates will bring some transparency in pricing of loans.

Vaibhav Aggarwal is an expert Author on RupeeTimes who writes about personal finance related terms like Home Loans, car loans, credit cards and fixed deposit.

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Home Loan Rates Hit the Roof

New home buyers and those who have already taken loans under floating rates should prepare for tough times ahead. On Monday, Housing Development and Finance Corp (HDFC), the leader in the home loan market, and ICICI Bank, the largest private sector bank in India, both announced raising home loan rates for existing as well as new customers by as much as 75 basis points (100 basis points=1%). Both the entities also announced raising deposit rates. The hike in interest rates as well as deposit rates for HDFC is effective July 1 while for ICICI Bank it was June 30.

Post this hike, for existing HDFC customers, for every Rs 1 lakh of home loan of 20 years tenure under the floating rate, the increase in monthly instalment would be Rs 34 while for loans of 15 years, the increase would be Rs 32. For new customers, for every Rs 1 lakh of loan for a 20-year tenure, the EMI would work out to Rs 1,033. The hikes come after the Reserve Bank of India (RBI) raised key rates for banks last week by 50 bps, the second increase this month. The RBI decision was aimed at bringing down inflation rate, which, at 11.42% last week, is at a 13-year high level. SBI, the country's biggest bank, increased its lending rate by 50bps to 12.75% last Thursday. Some other PSU banks-Union Bank, State Bank of Bikaner & Jaipur and Corporation Bank-have also followed SBI in increasing rates.

HDFC has however spared its existing customers some inconvenience by raising floating rate by 50 basis points (bps), while new customers would be faced with a hike of 75 bps. In ICICI Bank, the 75bps hike is acrossthe-board. For new home loan customers with HDFC, the floating rate of interest would be at a minimum of 11% per annum, while the fixed rates will be at 14%, a release from the company said. HDFC has also increased its rates on deposits by 50 basis points for most tenures. The rate of interest on consumer loans from ICICI Bank has also been increased by 75bps. The bank has increased its floating reference rate (FRR) for consumer loans by 75 basis points with effect from June 30. The revised FRR will be 13.50% per annum from 12.75% at present, a release from the bank said.

Bank of India increased its benchmark prime lending rate by 0.5 per cent to 13.25 per cent. With this, loans in all segments except auto, home and agriculture portfolios will become dearer to BoI's borrowers, a senior BoI official said. "Interest rates on all PLRrelated loans except home, auto and agriculture segments will go up with the PLR hike with effect from July 1," the official said. Dena Bank announced a 0.5 per cent hike in PLR. The bank also hiked its domestic term deposit rates by 0.25-0.75 per cent for various maturities. Allahabad too decided to increase its benchmark prime lending rate by 0.5 per cent to 13.50 per cent, effective July 2.

Mahendra Varma has 3 years experience in writing articles; he is currently working as web analyst in http://www.maaproperties.com

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Interest Rates and the World Economy

There is no effective way to measure the source of funds as well as the amount of funds each bank and lending institutions have. This would mean facing difficulty in making estimates as to the credit facilities and funds that they have available for lending to business enterprises and individuals. This could have help set the overnight benchmark interest rates. As the Federal Reserve gradually lowers interest rates, it also slowly depletes its funds. The only thing that has been holding the interest rates is the Federal Reserve intervention. The interest could have skyrocketed without the timely intervention of the Federal Reserve.

CHINA

China is demonstrated good export trading and economic development. The economy is definitely showing increase signs of growth and consumption. China has a massive surplus and foreign currency reserves estimated to be worth more than US$2 trillion dollars. China's surplus is one of the biggest worldwide! Their FDI is also impressive.

China supports the consumption of the United States as well as Europe. China has been exporting fish and other products to many neighboring countries as well as US and Europe. As long as China continue to export and support the US and Europe required commodities, they will have a good possibility to improve economic situation as well as build international relations effectively.

China has been supporting the consumption of the two big economic giants US and Europe, which makes it possible for these governments to issue more bonds. The action carries the hope that China and other rich sovereign countries would buy their bonds so they could efficiently support and finance national deficits. Issuing bonds while at the same time creating extra money supply might not be the best approach but it is still better than issuing more money supply without the support of a corresponding debt or higher tangible asset value.

The hot property market of China has become highly speculative. Although the rental yield of China's properties are very low, these properties carry sky-high prices without any rental value. Many properties for rent are still unoccupied. This is surely a good example of bubble or what they would call, a musical chair, where one hopes to pass the problem to the next person for a profit. Assets that do not generate a yield turn into liabilities. If this situation will finally explode, the whole of Asia is set to suffer.

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