What is Base Rate

To bring transparency to the credit field and to make sure that the banks charge a lower interest rate, the RBI implemented the notion of base rate across all banks in India.

Who Calculates the Base Rate in India?

The RBI (Reserve Bank of India) calculates the base rate in India. The RBI sets this to bring uniform rates to all banks in India.

A base rate comprises of all the elements of lending rates, which are common among the borrowers of various categories.

Note: Lending rate is the rate of interest that a bank lends to its customers. A lending rate includes the operating cost of a product, tenor premium, credit risk premium, and the borrower-specific cost. Therefore, it differs from one segment to the other.

How is Base Rate Calculated?

The calculation of base rate is based on different factors. A few of them are:

1. Deposit cost
2. Administrative cost
3. Unallocated overhead cost
4. The amount of profit a bank earns in the last financial year

Current Base Rate of Banks

The current base rate of banks are as follows:

Applicability of the Base Rate

1. Every bank loan must be priced based on the base rate set by the Reserve Bank of India (RBI).

1. Some loans like DRI advances, staff loans, or loans against deposits are exempt from the base rate rule.

1. The base rate is the minimum lending rate; banks cannot offer loans below this rate.

1. It acts as a reference for floating interest rates; any changes affect existing linked loans.

1. Banks are required to review their base rate quarterly, after board or ALCO approval.

1. All branches and bank websites must clearly display the base rate to ensure transparency.

1. Any changes to the base rate must be publicly announced through official channels.

1. Banks must report their minimum and maximum lending rates to the RBI every quarter.

How Does Base Rate Affect the Corporate Borrowers?

Earlier when BPLR (Benchmark Prime Lending Rate) system was employed, large corporations enjoyed rates as low as 3% - 6%. But ever since the concept of base rate has been implemented, no bank is allowed to lend a loan below the base rate.

How Does Base Rate Affect the Retail Customers?

Well, the impact on a retail customer depends. It could either increase or decrease by 25 basis points compared to the present interest rate he/she enjoys. However, this change will not impact any of the existing customers.

Note: 100 Basis Points = 1%

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