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Last modified / updated Jan. 01, 2016

Understand Base Rates a new term come into force in Banking Industry

What is base rate?

It is the minimum rate of interest that a bank is allowed to charge from its customers unless mandated by the government. RBI stipulates that no bank can offer loans at a rate lower than Base Rate to any of its customers . The Points be considered in calculation of base rate

A host of factors, like the cost of deposits, administrative costs, a banks profitability in the previous financial year and a few other parameters, with stipulated weights are considered while calculating a lender's Base Rate. the cost of the deposits has the highest weight in calculating the new benchmark. Banks, however, have the leeway to take into account while calculating its BR, which it has fixed at 7.5%. The Date When the Base Rate will become Effective

Base Rate is effective from Thursday, 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 bank prime lending rate?

BR is a more objective reference number than the bank prime lending rate (BPLR) -- the current benchmark. BPLR is the rate at which a bank is willing to lend to its most trustworthy, low-risk customer. However, often banks lend at rates below BPLR. For example, most home loan rates are at sub-BPLR levels. Some large corporate also get loans at rates substantially lower than BPLR. For all banks, Base Rate will be much lower than their BPLR. Can a Bank Change its B.ase Rate?

A bank can change its Base Rate every quarter, and also during the quarter. What does it mean for corporate borrowers?

Under the BPLR system, large corporate who enjoyed rates as low as 4-6% will be hit since from July 1 no bank can lend at rates below BR. However, there is a chance that some corporate, with low-risk profile, would get a lower rate under the new system as under the Base Rate regime banks are expected to take into consideration the risk levels of the borrower. What does it mean for retail customers?

The impact could be an increase or decrease of 25 basis points (100 basis points=1%) compared to the current rate of interest they are enjoying. However, existing customers will not be impacted by this change. What does it mean for the banks?

Banks' net interest margin will be unaffected. The impact on banks' profitability because of moving to the Base Rate regime is yet not clear. Can a customer move from the BPLR to Base Rate regime before the expiry of the current BPLR-linked loan tenure?

It depends upon individual banks. Some banks, are offering such an option to existing customers. For customers, 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.