Base Rate is the minimum rate of interest that a bank is allowed to charge from its customers. The Working Group on Benchmark Prime Lending Rate (BPLR) (Chairman: Shri Deepak Mohanty) constituted by Reserve Bank of India (RBI) reviewed the present BPLR system and suggested changes to make credit pricing more transparent in its report in October 2009. Accordingly the RBI decided that banks will switch over to the system of Base Rate w.e.f. 1st July.2010 by replacing the existing BPLR system.
As per the recommendations all categories of loans should henceforth be priced only with reference to the Base Rate. However, the following categories of loans could be priced without reference to the Base Rate:
a) DRI advances
b) Loans to banks’ own employees
c) Loans to banks’ depositors against their own deposits.
See also Revised Guidelines on Base Rate
Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. While each bank may decide its own Base Rate, some of the criteria that could go into the determination of the Base Rate are: (i) cost of deposits; (ii) adjustment for the negative carry in respect of CRR and SLR; (iii) unallocatable overhead cost for banks such as aggregate employee compensation relating to administrative functions in corporate office, directors’ and auditors’ fees, legal and premises expenses, depreciation, cost of printing and stationery, expenses incurred on communication and advertising, IT spending, and cost incurred towards deposit insurance; and (iv) profit margin. (See illustration for computing the Base Rate)
Since the Base Rate will be the minimum rate for all loans, banks are not permitted to resort to any lending below the Base Rate. The actual lending rates charged to borrowers would be the Base Rate plus borrower-specific charges, which will include product-specific operating costs, credit risk premium and tenor premium. Banks are required to review the Base Rate at least once in a quarter with the approval of the Board or the Asset Liability Management Committees (ALCOs) as per the bank’s practice.
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. Banks, however, should not charge any fee for such switch-over.