Base Rate:
RBI had made it mandatory for all banks to introduce Base Rate wef 1st July, 2010. The Base Rate is the minimum interest rate of a Bank below which it cannot lend, except in cases allowed by RBI. Base Rate system is applicable to all new loans and for those old loans that come up for renewal after July 2010. Existing loans based on the Basic Prime Lending Rate (BPLR) system may run till their maturity. In case existing borrowers want to switch to the new system, before expiry of the existing contracts, an option may be given to them, on mutually agreed terms.
As per RBI guidelines (as in July 2012), the following categories of loans could be priced without reference to Base Rate:-
- Differential Interest Rate Advances;
- Loans to banks' own employees including retired employees;
- Loans to banks' depositors against their own deposits
RBI does not fix the base rate. It has issued broad guidelines to bank as to how they should arrive at the base rate. Thus, individual bank itself fixes its own base rate. The calculations of the BPLR by various banks was not transparent. In case of BPLR, Banks normally used to take into consideration the factors like cost of funds, administrative costs and a margin over it. However, such parameters were neither disclosed by banks nor were same for all the banks. The Base Rate calculations include all those cost elements which can be clearly identified and are common across borrowers. The constituents of the Base Rate includes
i. the interest rate on retail deposit (deposits below Rs. 15 lakh) with one year maturity (adjusted for CASA deposits);
ii. adjustment for the negative carry in respect of CRR and SLR
iii. unallocatable overhead cost for banks which would comprise a minimum set of overhead cost elements; and
iv. average return on net
Current Base Rate is 10 – 10.25% (15 Jan 2015)
