The banks have been instructed by the Reserve Bank of India to facilitate present home loan borrowers to gain advantage from lower rates along with new customers.

A senior IBA official confirmed that IBA had received a letter from the central bank, in which it had urged the banks to think once more over their decision, following lenders informed the Reserve Bank of India (RBI) last year that reducing rates on all home loans is unviable for them.

It was RBI Deputy Governor K. C. Chakrabarty who raised the issue at the monetary policy review meeting last month.

With the aim of luring new customers, a special home loan schemes were unveiled at 8% by the banks in late 2008. However, the banks did not scrap the lending rates of the existing borrowers, which was as high as 12 percent.

It is only when banks revise the BPLR that the rates on older loans can change, since banks commonly price their home loan rates linked to the benchmark prime lending rate or BPLR.

Generally the spread is nearly 200-250 basis points below the BPLR, which is on an average 11-12%.

The IBA official explained, "RBI is saying that for any change in product pricing, banks should change the BPLR so that the benefits are passed on to everyone."

The managing committee meet on February 26 will see the IBA discussing the central bank's latest letter.