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• Base Rate

What is Base Rate?

The concept of base rate was introduced on July 1 2010 at all banks across India. Before the base rate system, BPLR (Benchmark Prime Lending Rate) was employed.

However, with the implementation of the base rate system, credit pricing became more transparent. Here is an article that explains in-depth about the base rate and other related information, which you might require assistance to comprehend better.

The base rate is the minimum rate of interest that is set by a countryâ€™s central bank for lending a loan. This rate is usually taken as the standard interest rate by all the banks functioning in that country. Once the base rate is announced by the central bank, no bank is permitted to offer any type of loan to its customers at a rate that is lower than the base rate that has been set by the central bank of a nation.

Why Is Base Rate System Used?

The credit market in the earlier days was not that transparent. There used to be some segments that were hidden or closed. There was no clear information about how much interest rate a bank actually charged for a loan.

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:

• Deposit cost
• The amount of profit a bank earns in the last financial year

Note: The current base rate of RBI is 7.25 - 8.80%

Current Base Rate of Banks

The 2023 or current base rate of banks are as follows:

 Name Of The Bank Current Base Rate Axis Bank 8.45% Canara Bank 8.80% HDFC Bank 7.45% Dhanlaxmi Bank 9.80% Andhra Bank/Union Bank 8.40% SBI (State Bank of India) 7.55% Bank of Baroda 8.15% Karnataka Bank 8.00% IDBI Bank 9.65% Kotak Mahindra Bank 7.30% PNB (Punjab National Bank) 8.50% Union Bank of India 8.40% Syndicate Bank/Canara Bank 8.80% Corporation Bank/Union Bank 8.40% Bank of India 8.80% Oriental Bank of Commerce/PNB 8.50% Punjab & Sind Bank 9.70% Catholic Syrian Bank 9.35% RBL Bank 8.50% Bank of Maharashtra 9.40%

Applicability of the Base Rate

• Every loan category should be priced based on the base rate that has been set by the Reserve Bank of India. But a few loans can be priced without referring to the current base rate. These include the DRI advances, loans to a bankâ€™s depositor on their deposits, and loans to a bankâ€™s employees.
• The base rate set by the central bank or the RBI also serves as a reference benchmark for the floating rate of a loan.
• Any modifications in the base rate are applicable to all the existing loans that are associated with the current base rate.
• The base rate set by the central bank is always minimum. Therefore, no bank is allowed to give a rate below than what is set to its customers.

It is mandatory for every bank to review its base rate on a quarterly basis. This action has to be taken only after the ALCOs (Asset Liability Management Committees) or the board approves it. Since the primary intention of implementing the base rate system is to sustain transparency in the prices of a lending product, every bank has to reveal its base rate details at all the branches and their official websites too.

Any modifications in made to the base rate have to be conveyed to the public frequently via appropriate channels. In addition, it is compulsory for all the banks to give proper details to the RBI regarding the minimum & maximum lending rates on a quarterly basis.

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% â€“ 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%

FAQs on Base Rate

1. What is the base rate?

The base rate is the minimum rate of interest that is set by a country's central bank for lending a loan.

2. When did the base rate come into effect in India?

The base rate came into effect in India on 1 July 2010.

3. Who calculates the base rate in India?

The RBI calculates the base rate in India.

4. What is the current base rate of the RBI?

The current base rate of the RBI is 7.25% to 8.80%.

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