Features and Calculation of Base Rate

Features and Calculation of Base Rate

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The RBI's minimum interest rate below which Indian banks cannot lend to their customers is known as the Base Rate. The RBI rule stipulates that no bank may offer loans at an interest rate lower than the base Rate unless mandated otherwise by the government. The base Rate, which was introduced in June 2010, is simply referred to as the typical lending rate offered by commercial banks. It is mandated to certify that banks transfer savings due to low interest rates to lenders and thereby, increase transparency. The credit risk premium is added to a suitable spread when the base Rate is added to loans to determine their price.

Over the past few years, the Indian financial sector has undergone numerous reforms. As a result, banks are given the freedom to set interest rates on their own provided that they adhere to the RBI's guidelines. While banks have the ability to set and alter interest rates, they must also take into account the RBI, which has implemented a number of rate reforms with the introduction of concepts like PLRR, or the Prime Lending Rate Regime, and BPLR, or the Benchmark Prime Lending Rate, in order to ensure that the interest rates offered by various banks are roughly comparable to one another and competitive. One of the most recent changes made by the RBI is the base Rate.

Base Rate Calculation - The Reserve Bank of India, the nation's central regulatory body, determines the base rate. To present uniform rates for all the banks (nationalized or, private), the RBI decides upon the base rate. All aspects of lending rates that are common to borrowers from various categories are included in the base rate. Base Rate estimation is finished by thinking about a great deal of elements. These include, among other things, the cost of deposits, the bank's administrative expenses, the bank's profitability in the previous fiscal year, and unallocated overhead costs.

When determining the lender's base rate, the bank also takes into account a number of other factors and assigns them weights. The cost of deposits receives the maximum weight in the calculation of the new benchmark. However, banks can take into account the cost of deposits over a variety of tenures when determining their base Rate.