What is base rate?
The base rate (BR) is the minimum rate of interest that a bank is allowed to charge its borrowers. Unless mandated by the government, the RBI rule stipulates that no bank can offer loans at a rate lower than the BR to any of its borrowers.
How is the base rate calculated?
A host of factors, like the cost of deposits, administrative costs, a bank's profitability in the previous financial year and a few other parameters, with stipulated weights, are considered while calculating a lender's BR.
The cost of deposits has the highest weight in calculating the new benchmark. Banks, however, have the leeway to take into account the cost of deposits of any tenure while calculating the BR.
When will the base rate come into force?
It is effective from July 1. However, all existing loans, including home loans and car loans, will continue to be at the current rate. Only the new loans taken on or after July 1 and old loans being renewed after this date will be linked to BR.
How is it different from benchmark prime lending rate?
BR is a more objective reference number than the benchmark prime lending rate (BPLR). BPLR is the rate at which a bank is willing to lend to its most trustworthy or low-risk customers. However, often, banks lend at rates below BPLR. For example, most home loan rates are at sub-BPLR levels. Some large corporates also get loans at rates substantially lower than the BPLR. For all banks, BR will be much lower than their BPLR.
How often can a bank change its BR?
A bank can change its BR every quarter, and also during the quarter.
What does it mean for corporate borrowers?
Under the BPLR system, large corporates who enjoyed rates as low as 4-6 percent will be hit as no bank can lend at rates below BR after July 1. However, there is a chance that some corporates, with low-risk profile, would get a lower rate under the new system as under the BR regime, banks are expected to take into consideration the risk levels of a borrower.
What does it mean for individual customers?
The impact could be an increase or decrease of 25 basis points (100 basis points is one percent) compared to the current rate of interest they are paying. However, existing customers will not be impacted immediately.
What does it mean for banks?
Banks' net interest margins will be unaffected. The impact on banks' profitability because of moving to the BR regime is not clear yet.
Can a borrower move from the BPLR to BR regime before the expiry of the current BPLR-linked loan tenure?
It depends on individual banks. Some banks are offering such an option to existing borrowers. For borrowers, a shift before the expiry of the tenure of the existing loan will make sense only if the BR-linked interest rate is lower than the BPLR-linked rate.
