Base Rate refers to the minimum interest rate which the bank allows to lend money, except in cases allowed by the Reserve Bank of India. Following an announcement in the APC by the RBI in the year 2010 Base Rate replaced Benchmark Prime Lending Rate. Various factors of lending rates are common across all categories of debtors. A bank can choose any benchmark of Base Rate for a specific tenure and disclose it transparently. There can only be one Base Rate for one bank and cannot differ in various branches.
Despite this, they do have the feature and liberty to have any Base Rate. Remember, a bank can change the BR at any point i.e.Quaterly or in-between the quarter. Some of the cases in which the Base Rate policy isn’t application after a statement by RBI stated in July 2012 are: DRI Advances, Loans to bank staff and retired employees, Loans against customer’s deposits. Note: No bank can offer loans at a rate lower than Base Rate to any of its customers. There are various which are considered while the Base Rate is being calculated – cost of deposits, administrative costs, the amount of profit earned or gained by the bank in the previous accounting year.
In case of reoriented borrowings, if some of the Working Capital Term Loan Scheme, Funded Interest Term Loan etcetera requires granted below the Base Rate for the purpose of growth, and there are compensations – Terms and conditions such lending will not be constructed as a violation of the Base Rate guidelines. The cost of deposits is considered to be the most influential factor in determining the Base Rate by the bank. This is the new type of rate and isn’t affecting to the banks. Banks’ net interest margin will not be affected. The effect on banks’ profit-percentage because of moving to the BR regime is yet not clear. The Base Rate system came into effect from July 1, 2010. In case, you had been under the Benchmark Prime Lending Rate and changed to BR banks shouldn’t charge its customers for any type of switch-over; though some banks would charge minimum fees accordingly.
Spread is the difference between the BPLR and the loan interest rate. For example: X + X – Benchmark Prime Lending Rate = Spread, Where X is any amount. Some banks provide loan and advances at a lower rate than the BPLR. This enables them to attract bigger clients or customers, which offer huge loan deals since the high credit worthiness is a likely indicator of customers making regular payments and in turn this helps the banks to increase business and get more profits from their loans. Currently, there is no significance and more importantly existence of BPLR. BPLR only is taken under consideration if a loan is sanctioned before the year 2010 in the BPLR system. And, yes! A borrower can change from BPLR to BR anytime according to his wish. There is no restriction or an agreement which says that he or she cannot change. This scheme was introduced in the 2003 and simply failed to achieve its main objective i.e. Transparency which the Base Rate system has rightly achieved since its introduction in 2010. The major fault that led to the downfall o failure of BPLR is that the banks can have a rate for loans below the BPLR. For the same reason, it was also difficult to assess the transmission of policy rates of the Reserve Bank to lending rates of banks. Basically, it was the interest rate the commercial banks charged (or at least they were expected to charge) to their more loyal and credit-worthy customers or clients.
