Base rate
Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
The base rate was the minimum lending rate in force from July 2010. Banks could not lend below it. Each bank worked it out from its average cost of funds, meaning what it paid on average for all its deposits and borrowings. It replaced the BPLR (2003), which was opaque because banks often lent below it. The base rate was itself replaced by the MCLR in April 2016 because it moved too slowly when the RBI changed its rates.
Example
Suppose the RBI cuts its policy rate. A bank's older deposits still carry high interest, so its average cost of funds barely falls. Its base rate, and the rates borrowers pay, stay almost unchanged for months.
Don't confuse with
- MCLR (April 2016): based on the marginal cost of funds, the cost of raising new money, so it responds faster.
- EBLR (1 October 2019): linked to an external benchmark such as the repo rate plus a spread. It is mandatory for new floating-rate retail and MSME loans.
Related concepts
- CASA ratio
- Credit-deposit ratio
- Marginal Cost of Funds based Lending Rate
- External Benchmark Lending Rate
- Loan-to-value ratio
- Adverse selection
- Credit information company
- Letter of credit
- Factoring
- Trade Receivables Discounting System