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Base Rate: by Pradeep Kumar Mba 3 Sem

The document discusses the base rate system implemented in India in 2010 as a replacement for the benchmark prime lending rate (BPLR) system. It provides the following key points: 1) The base rate system requires banks to set a minimum interest rate for loans based on their cost of funds and other factors. 2) A working group recommended introducing base rate to replace BPLR and increase transparency in lending rates. 3) Under the base rate system, actual lending rates are calculated as the base rate plus additional charges for risk, tenure, product type, etc. 4) The base rate aims to reduce teaser rates, bring more transparency to lending, and increase credit flow to small borrow

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131 views13 pages

Base Rate: by Pradeep Kumar Mba 3 Sem

The document discusses the base rate system implemented in India in 2010 as a replacement for the benchmark prime lending rate (BPLR) system. It provides the following key points: 1) The base rate system requires banks to set a minimum interest rate for loans based on their cost of funds and other factors. 2) A working group recommended introducing base rate to replace BPLR and increase transparency in lending rates. 3) Under the base rate system, actual lending rates are calculated as the base rate plus additional charges for risk, tenure, product type, etc. 4) The base rate aims to reduce teaser rates, bring more transparency to lending, and increase credit flow to small borrow

Uploaded by

Pradeep
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Base Rate

By
Pradeep Kumar
MBA 3rd Sem
Base Rate System
Base Rate System is for the banks to set a level of minimum
interest rates charged while giving out the loans.

The concept of Base Rate was


introduced by Bank of England.

The base rate system was implemented


in India in July, 2010.
Base Rate System
The Base Rate System will not be applicable for the following
type of loans:

• Agricultural Loans
• Loans given to own employees
• Loans against deposit
• Export Credit

Applicability of Base Rate System:

• It will be applicable for all new loans.


• Old loans that come up for renewal.
• Option to existing borrowers on Choice.
Benchmark Prime Lending Rate

The BPLR is the interest rate that commercial banks


charge their most credit-worthy customers. Banks are free
to decide the BPLR but their interest rates have to have a
reference to the BPLR fixed. BPLR was implemented in
the year 2003.

Limitations:
• Lack of transparency.
• Teaser rates by bank.
• Barrier in transmission of monetary policy.
Working Group Recommendations:
The working committee on BPLR submitted its report on
October 2009. (Chairman Shri Deepak Mohantey)

Recommendations:
• After carefully examining the various possible options, the Group is of the
view that there is merit in introducing a system of Base Rate to replace the
existing BPLR system.
• The proposed Base Rate will include all those cost elements which can be
clearly identified and are common across borrowers.
• The actual lending rates charged to borrowers would be the Base Rate plus
borrower specific charges.
• The Base Rate could also serve as the reference benchmark rate for floating
rate loan products, apart from the other external market benchmark rates.
• Banks should be free to lend to small borrowers at fixed or floating rates,
which would include the Base Rate and sector-specific operating cost, credit
risk premium and tenor premium as in the case of other borrowers.
• The interest rate on rupee export credit should not exceed the Base Rate of
individual banks.
• All banks should follow the Banking Codes and Standards Board of India
(BCSBI) Codes for fair treatment of customers of banks.
Advantages Of Base Rate
• It will bring transparency in system.

• It will put a full stop on teaser rates.

• Lending rates for the corporate may go up.

• It will increase the credit flow to small borrowers.


Computation Of Base Rate:

Base Rate = a + b + c + d
Computation Of Base Rate:

Lending Rate Determination =


Base Rate + Product specific operating costs + Credit risk premium
+ Tenor Premium
Impact of Base Rate:
• Public Bank have larger deposit base.

• Public Banks have access to govt. treasury.

• Banks will find it difficult to maintain high end


corporate portfolio.

• SSI’s will get the power to negotiate.


Review of Base Rate:
• Banks are required to review the Base Rate at least
once in a quarter.
• They have to seek approval of the Board or the Asset
Liability Management Committees (ALCOs) as per the
bank’s practice.
• Banks are required to exhibit the information on their
Base Rate at all branches and also on their websites.
• Changes in the Base Rate should also be conveyed to
the general public from time to time through
appropriate channels.
• Banks are required to provide information on the actual
minimum and maximum lending rates to the Reserve
Bank of India on quarterly basis.
Base Rate of Major Banks:

Bank Base Rate Bank Base Rate


(%) (%)
SBI 7.5 HDFC 7.25
ICICI 7.5 PNB 8
Union Bank of 8 Central Bank of 8
India India
Axis Bank 7.5 Allahabad bank 8
Bank of Baroda 8 Bank of India 8
Canara Bank 8 Corporation 7.75
Bank
Dena Bank 8.25 Indian Bank 8
Oriental Bank 8 Indian Overseas 8.25
of Commerce Bank
Syndicate Bank 8 IDBI Bank 8
Some General Questions:

• Is my interest rate going to be cheaper? Will my EMI


change?

• Should I change to a bank with a lower base rate?

• How does the base rate affect my pre-existing loan?

• Will the base rate remain fixed forever?


Thank You

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