ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Back to Base: Setting the Base Rate for Banks

In order to ensure greater transparency in setting lending rates, banks are expected to replace from 1 July the existing benchmark prime lending rate system with the new one of a base rate. Yet, the methodology and the approach that each bank will follow in setting this rate is still not clear. According to the Reserve Bank of India's guidelines, determination of the base rate will depend on the cost structure of bank liabilities as also the capacity to charge lower interest rates for certain groups of borrowers. Therefore, the base rate is likely to hover around the minimum lending rates charged at present by different bank groups (public sector, private sector and foreign banks). Since these rates differ across bank groups, the base rates too are likely to differ, leading to some competition. However, given the new system that the banks are going to introduce, it will take a while before a clear picture emerges.

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