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    Base Rate

    Base Rate, as the name suggests, is the basic or the minimum rate of lending as per the guidelines of the Reserve Bank of India. No commercial bank is allowed to offer loans to the borrowers at a rate that is lower than the base rate. This bottom-line-rate system is measure adopted by RBI to increase the clarity and transparency of the lending process in India. A credit risk premium along with the base rate is what that makes the actual pricing of a loan.

    Currently, BR is used as the benchmark for the interest rate of financial products in every Indian bank. RBI has set this standard interest rate system and mandated it for all the banks in India without any exception. Unless the Government asks for a change, banks are no way allowed to provide loans at an interest rate below their pre-fixed base rate.

    The commercial banks are allowed to decide their own base rates for a particular tenor keeping the RBI guidelines in consideration. This means a bank is free to choose any benchmark rate as its minimum interest rate of lending. However, this rate should be determined on the basis of MCLR and must be revised every month as per the latest RBI norm.

    When Did the Base Rate Come into Effect?

    The Base Rate system introduced by RBI as the standard rate of lending for all the commercial banks in India came into effect from 1 July 2010.

    It was applicable on all the new loans taken by the customers on or after 1 July 2010 along with the old loans that were renewed after this date.

    The banks were allowed to continue with the BPLR system for the loans that were approved before 1 July 2010. However, they also had the option to make a switch to the base rate system before the expiry of the loans.

    Why was the Base Rate System Introduced by RBI?

    This benchmark rate system was adopted by RBI as a part of the various measures that it has adopted to reform the interest rates set by the banks. Though the commercial banks in India have the freedom to decide their own interest rates, RBI opted for a number of reforms to regulate their interest rate setting system.

    Initially, the Benchmark Prime Lending Rate (BPLR) system was introduced by RBI to draw a similarity between the interest rates sets by various banks. In this system, banks were allowed to fix their standard lending rates with their Boards approval. But, the calculations being not very clear, this system failed to bring transparency in the loan rates. In this system, the banks had the flexibility to lend at a rate below the BPLR and this is why the lending rates were not uniform for all the borrowers. The banks tended to offer loans to their low-risk customers at a rate much lower than their BPLR. As a result, while the corporate giants used to get loans at a lower interest rate than the BPLR, the common borrowers had to pay the usual rates. Moreover, there were discrepancies in the rates of different types of loans which is why home loans were offered at a sub-BPLR rate to the reliable customers.

    After the failure of BPLR, RBI introduced the Base Rate system and replaced the existing BPLR system in order to make the lending system more transparent, clear and unbiased in terms of the interest rates. Under this system, the banks have to decide a minimum rate under which they can’t lend to any borrower except some special cases such as DRI allowances, loans to bank’s depositors against their own deposit and loans to bank’s employees. After its introduction, the banks were bound to be neutral and follow one fixed rate while offering loans to the borrowers.

    Hence, RBI introduced Base Rate and removed BPLR to benefit the borrowers by abolishing the discretion of the commercial banks in India.

    Difference Between Base Rate and Benchmark Prime Lending Rate

    There is a basic difference between the Base Rate and the Benchmark Prime Lending Rate of a bank. While the Benchmark Prime Lending Rate or BPLR is the interest rate at which a particular bank is interested in lending money to its most trustworthy customers, the Base Rate or BR is the minimum rate mandated by the Reserve Bank of India to the authorised banks for lending money. As per the instructions of RBI, all Indian banks are mandated to follow their base rate instead of their prime lending rate while providing loans the borrowers.

    The main difference between BR and BPLR is that BR being a standard rate is more objective or neutral than BPLR. While the banks had the flexibility to set the interest rate for their individual customers under BPLR, BR enforces a strict restriction on the same and doesn’t allow banks to give loans below the fixed minimum interest rate.

    How is the Base Rate Determined?

    The Base Rate of a bank is not determined by the Reserve Bank of India. Banks decide and fix their own base rates in accordance with the rules and regulations of RBI. As the banks set their own base rate, every bank has its own BR which might vary from one bank to another.

    As per the RBI norms, the base rate of a bank is calculated on the basis of the elements of lending rates which are clearly identifiable and common across all types and categories of customers. These include factors like the basis of the cost of the deposit, administrative expenses, banks profit record etc. After deciding the BR, banks have to openly declare it and mention on their websites to keep it clear and transparent for the borrowers.

    Basic Method of Base Rate Calculation

    Right after its introduction, the BR of a lender used to be determined on the basis of the common elements that are applicable to each borrower. Here are the components based on which the BR of a particular bank is calculated:

    • Cost for the funds (Rate of interest given for deposits)
    • Operating cost
    • Minimum rate of profit
    • Cost of the CRR (BBI is not providing interest on banks for 4% CRR)

    All of these factors have their own pre-fixed weights and while calculating the BR, the cost of deposits held the highest weight. However, the banks have the flexibility to decide which tenure’s cost of deposit they want to take into consideration for deciding the base rate.

    For instance: The State Bank of India considers its 6 months cost of deposit while computing the BR.

    Modified Base Rate under MCLR Norm

    As per the recent MCLR regulation of RBI, the base rate has undergone some modification. The Indian banks have shifted to Marginal Cost of Funds-Based lending system with effect from 1 April 2016. Under this norm, the banks have to make use of the MCLR method while calculating their base rate. According to this methodology, the cost of the funds needs to be calculated as per the marginal cost. The following are the components that decide the MCLR:

    • Marginal cost of funds
    • Negative CRR carry on amount
    • Cost of operation
    • Premium of the tenor

    Note- The marginal cost is determined by calculating the repo rate of the bank and several additional expenses made for acquiring funds.

    Under the MCLR reform, the banks are mandated to revise their MCLR every month which makes this method more dynamic in nature.

    Which loans are Exempted from Base Rate?

    Though RBI has mandated base rate as the minimum interest rate to be charged from the borrowers, there are some loans on which this standard rate is not applicable. Banks can decide the rate at which they want to offer these loans to the customers. These are the types loans which are exempted from BR:

    • Differential Rate of Interest or DRI allowances.
    • Loans to the employees of the concerned banks.
    • Loans to the bank's depositors in return of their own deposits.
    • Government-approved interest rate subvention to rupee export credit and agricultural loans.
    • Special instances of restructured loans.

    How is BR More Profitable Compared to BPLR?

    Base Rate is a new concept of lending money which makes the borrowing process more transparent and unbiased for the customers. Before the introduction of Base Rate, banks were allowed to charge interest on the offered loans as per their own preference under the Benchmark Prime Lending Rate. But after RBI has mandated the Base Rate for all the commercial banks, they are liable to abide by the new rule and can no more be partial while lending money to their trustworthy customers.

    The BPLR based lending process was complex and the customers had no exact standard to know the correct interest policy of a particular bank. Though many times, RBI had lowered the minimum lending amount for the banks, the banks used to follow their own lending rate (BPLR) to get the maximum profit from the borrowers. But now after the replacement of the BPLR with Base Rate system, customers are able to get loans at fair interest rates without ending up paying more than the favoured customers of the banks.

    In short, BR being the benchmark for interest rates, has made the loan borrowing process fairer and ended the monopoly of the banks. Moreover, as banks have to clearly declare their respective base rates on their website, borrowers can compare the rates of all the banks and then decide on the most economical one.

    Can a Borrower Change an Existing Loan from BPLR to BR?

    Yes, as per the RBI guidelines you can change your existing loan rate from BPLR to BR. Though the BR is applicable to all the new loans sanctioned after 1 July 2010, if you have loans that were sanctioned before this date, you can easily switch from BPLR to BR by reaching out your nearest loan center or the customer support executives.

    Under BR you are most likely to pay less interest compared to BPLR as BR is more neutral and customer-friendly. Thus, if have already taken a loan based on BPLR, it will be wise to change the rate of interest to BR soon as this will help you to cut a significant amount of money on your monthly EMIs.

    Is It Possible for the Banks to Change Their Base Rate?

    Yes, banks can change their base rate once in every month. While earlier the banks were allowed to change their BR once in a quarter, the new MCLR reform has made it mandatory for the banks to change their basic lending rate once in a month. As per the new norm, banks have to review their base rate every month and make necessary changes. After review, every bank has to release the new Base rate to the public. The entire process is highly transparent and it directly benefits the customers.

    How Has BR Made the Lending Process More Transparent in India?

    BR has brought transparency as well as stability in the Indian lending system by replacing the BPLR based lending process. Before the introduction of the Base rate, banks used to lend money based on their own BPLR resulting in a high profit for them and fewer benefits for the borrowers. But after the implementation of the BR system, the commercial banks are no more able to lend money to any borrower below the benchmark rate. The customers can now pay an interest amount as per the base rate mentioned on the website without any discrimination and avail loans to meet their financial requirement at an affordable cost. In this way, BR has introduced more clarity and transparency in the system which has largely benefited the borrowers.

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    We can say that BR has helped RBI to take better control of the financial lending system in India. As the banks can’t ask for unfair interest rates from the customers, the bank supremacy in Indian financial market has finally come to an end.

    Base Rate of the Top Indian Banks in May 2017

    Name of the Bank Latest Base Rate
    Corporation Bank 9.65%
    ICICI Bank 9.35%
    HDFC Bank 9.25%
    Axis Bank 9.25%
    Federal Bank 9.63%
    Yes Bank 10.25%
    Andhra Bank 9.70%
    Citibank 9.00%
    Standard Chartered Bank 9.25%
    Syndicate Bank 9.60%
    Dena Bank 9.70%
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