Base Rate

Base Rate is the minimum lending rate that banks charge their customers from July 1, 2010 after a directive by RBI. Prior to this all lending rates were pegged to a Bank's Prime Lending Rate or PLR. The base rate was designed to replace the flawed benchmark prime lending rate (BPLR). The bulk of wholesale credit (loans to corporate customers) was contracted at sub-BPL rates and it comprised nearly 70% of all bank credit. Under this system, banks were subsidising corporate loans by charging high interest rates from retail and small and medium enterprise customers.

The introduction of the Base Rate aims at bringing the transparency in the lending market. Base Rate has also become the new floor rate below which no bank can lend. Under the new rule, banks were free to use any method to calculate their base rates (the RBI did provide an 'illustrative' formula), provided the RBI found it consistent. Banks were also directed to announce their base rates on their Websites, in keeping with the objective of making lending rates more transparent.

As per RBI guidelines (as in July 2012), the following categories of loans could be priced without reference to Base Rate :-
(a) DRI Advances;
(b) Loans to banks' own employees including retired employees;
(c) Loans to banks' depositors against their own deposits