Base Rate

Subject – Economy

Context – SBI lifts base rate a tad, to affect pre-2019 loans

Concept –

Base rate is the minimum rate set by the Reserve Bank of India below which banks are not allowed to lend to its customers.
Base rate is decided in order to enhance transparency in the credit market and ensure that banks pass on the lower cost of fund to their customers. Loan pricing will be done by adding base rate and a suitable spread depending on the credit risk premium.

Factors that determine the base rate

Each bank can determine their base rate in accordance with the norms given by the RBI. According to the RBI, Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers.
The base rate may differ from one bank to the other. But the following four components usually determine the base rate of particular bank. These components are:
- Cost for the funds (interest rate given for deposits),
- Operating expenses,
- Minimum rate of return (profit), and
- Cost for the CRR (for the four percent CRR, the RBI is not giving any interest to the banks)
The base rate of one bank may differ from another bank due to difference in one these factors most probably due to difference in interest rate.