Skip to main content

Decoding Base Rate

 

 

 

How does the new base rate matter to you?

Any loan you take from a bank will be at an interest rate linked to the base rate.
The rate will be fixed by adding a certain borrower-specific charge to the bank's base rate. The base rate will also be the reference benchmark rate for floating interest rate loans that you take from a bank. Individual borrowers who have home loans on floating rates, the base rate will matter a lot. RBI has mandated that banks do not lend below their respective base rates after July 1.

How will it be calculated?

Individual banks will calculate their base rates by factoring in

(1) The interest rate on retail deposits (for amounts below Rs 15 lakh) with one-year maturity,

(2) The negative impact of RBI's prescription of cash reserve ratio or the proportion of cash that a bank needs to keep with RBI and statutory liquidity ratio or the minimum reserve that a bank needs to keep in cash,

(3) Unallocatable overhead cost for banks, and

(4) Average return on the bank's net worth.

What is the benchmark rate at present?


The base rate regime kicks off on July 1.
The previous benchmark for pricing loans was benchmark prime lending rate or BPLR. Till now, BPLR mattered for borrowers of loans up to Rs 2 lakh. It served as the RBI-mandated ceiling for these loans. Also, interest rates of many banks' floating rate home loans used to be benchmarked to BPLRs. BPLRs.

Why is BPLR being replaced?


A 13-member working group, constituted by the Reserve Bank of India last year, said in a report in October 2009, "The BPLR system was expected to be a step forward from the PLR system, which more or less represented minimum lending rates, to that of one which stood as a benchmark or a reference rate around which most of the banks' lending was expected to take place. However, over a period of time, several concerns have been raised about the way the BPLR system has evolved. These relate to large quantum of lending below BPLR, lack of transparency, downward stickiness of How cross-subsidisation took place?
The RBI group itself noted that "there was widespread public perception that the BPLR system led to cross-subsidisation in terms of underpricing of credit for companies and overpricing of loans to agriculture and small and medium enterprises." So, when you went to a bank to take a loan, you were charged at BPLR that will be pegged at a high level even though interest rates in the market were coming down. But if a large company went to the same bank, it would get a loan at a big discount to the BPLR, referred to as `sub-BPLR lending'.

How will the base rate be better?


In addition to the problems mentioned above, that affected you directly or indirectly, the BPLR system was also backward-looking. It factored in elements from loans already disbursed by a bank and ignored present market conditions. The base rate will include cost elements, which are clearly identifiable and common across borrowers. And you will be charged for a loan at base rate plus a charge that will be based on the bank's variable or product specific operating expenses, your credit risk and the premium for the tenure you are taking the loan for.

Should you blindly trust the base rate?

The base rate can be trusted. RBI has made it compulsory for banks to reveal all information on base rates and also disclose its maximum and minimum lending rates compulsorily. This will make the base rate figures reliable. But the complex factors that the base rate is based on could lead to erratic rates among different banks. Also, the final lending rate that a bank can charge may still throw up nasty surprises. You can be charged very high product costs and be told that your credit risk premium is high.

 

Popular posts from this blog

Debt Mutual Fund Dividends are Taxable

DDT is deducted when a non-equity fund declares dividends. Equity and balanced fund dividends are tax-free The AMC is correct to deduct the dividend distribution tax (DDT) as it is mandated by tax laws. DDT in mutual funds is deducted every time a non-equity fund declares dividends. Equity fund and balanced fund dividends are tax-free . It is possible that you have invested in a non-equity fund for the first time or have received the dividend under a non-equity fund for the first time. That is why this is the first occasion when you have come across DDT.   The rate at which non-equity schemes deduct DDT has also gone up after the July 2014 budget. This is due to a change in calculation methodology. Earlier, if the fund has to declare a dividend of R 100, it used to make a provision for R 128.3, paying R 28.3 to the taxman and distributing the balance to the investor. This allowed the investor to bear less tax since the effective tax rate was 22.07 per ce...

Franklin India High Growth Companies Fund

Franklin India High Growth Companies Fund Online One of the key developments that the Street is keenly waiting for is a cut in interest rates by Reserve Bank of India . With demand rising gradually, a rate cut is expected to boost earnings growth for companies. In such a situation, schemes which invest in high growth companies are best suited, especially when seen from a long-term perspective. One such scheme is Franklin India High Growth Companies Fund. Fund managers Anand Radhakrishnan, Roshi Jain and Srikesh Nair strictly follow valuation parameters when it comes to choosing stocks.Valuation parameters, such as enterprise value, price-to-earnings growth ratio, forward price-to-sales ratio and discounted earnings per share, play a critical role in selecting companies for investments. Taking into account these parameters, the fund managers invest in companies which are poised for high growth in their respective sectors. This approach has been in favour of the scheme and it has perform...

Avoid NFOs

  Don't get taken in by the flurry of new fund offers. You will be better off sticking to the tried and tested schemes.   For the past one year, to cash in on the bull run in equities, mutual fund houses have gone on a new fund offer (NFO) overdrive. But experts are unanimous in their advice: avoid NFOs . While past performance is not an indicator of how a fund will fare in the future, it does tell the investor how skilful the fund manager is. This crucial information is missing in an NFO. Not only is there no track record to judge an NFO by, many NFOs are similar to funds that already exist. If the new fund is similar to existing funds, you are better off investing in the latter. Around 67% of the new launches in 2014 were closed-end products. Investing in the NFO of a closed-end fund is doubly risky. In case the fund's performance is lacklustre, a closed-end fund does not allow you to exit. Even though closed-end funds are listed on the stock...

Mutual Fund Exit Load Changes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Mutual Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...

Atal Pension Yojana contribution Tax Benefit for spouse

Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B). The current limit for Section 80CCD (1B) is   Rs   50,000, over and above the   Rs   1.5 lakh limit under Section 80C. Section 80 CCD (1) is a different one, meant to cover employers' contribution towards NPS . You cannot get tax benefit by investing in the name of your spouse under Section 80 CCD . ------------------------------ ----------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in India for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Religare Tax Plan 4. DSP BlackRock Tax Saver Fund 5. Franklin India TaxShield 6. ICICI Prudential Long Term Equity Fund 7. IDFC Tax Advantage (ELSS) Fund 8. Birla Sun Life Tax Relief 96 9. ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now