Base Rate: In this post we will explain in brief about the meaning or definition of Base Rate adopted by bank. Interview season is on and we are trying to cover as many Banking Awareness topics as we can for the benefit of our thousands of students.
What is a Base Rate? The Base Rate is the minimum interest rate of a Bank below which it cannot lend, except in cases allowed by RBI. Before the Base rate the interest rates were decided by BPLR system. The Base Rate system has replaced the BPLR system with effect from July 1, 2010.
Difference between BPLR and Base Rate: Base Rate is more transparent then the BPLR and banks are normally not allowed to lend below the base rate (except for cases specified by RBI and given above). The calculations of BPLR were mostly not transparent and banks were frequently lending below the BPLR to their prime borrowers and also under pressure due to various reasons.
More on Base Rate: Base Rate includes all those elements of lending rates that are common across all categories of borrowers. Banks may choose any benchmark to arrive at the Base Rate for a specific tenor that may be disclosed transparently. There can be only one Base Rate for each bank. However, banks have the freedom to choose any benchmark to arrive at a single Base Rate but the same needs to disclose transparently.
Where Base Rate is not applicable? As per RBI guidelines (as in July 2012), the following categories of loans could be priced without reference to Base Rate:
- DRI Advances.
- Loans to bank staff and retired employees;
- Loans against customer’s deposits
We hope that now you will be able to reply questions on Base rate. Any further query on base rate can be asked in comment section given below.