The new base rate regime

Why did RBI banished the Benchmark Prime Lending rate, popularly known as BPLR and replaced it with the new Base Rate?

To start with, BPLR means the rate of interest that the banks would charge on the loans given to its best customers. However nobody quite understood how did the banks arrived at this rate and everybody used to get loans at sub PLR rates
Well this meant that something definitely was amiss.

This let to the introduction of the Base Rate.
Base Rate is the minimum rate that the banks incur.

Calculation of Base Rate

= Cost of deposits
+ Cost of running the bank.
+ Reasonable Return on its money

With its implication from 1st July itself, no bank can lend to its customers (except exempt categories as per RBI Guidelines) below its base rate.

The biggest public sector bank of India has set its Base Rate at 7.5%

Calculation of base rate for SBI

Cost of 6 month deposits = 5.4%
+ Negative Cost on CRR/SLR = 55 bps
+Unallocated Costs
(eg Running the bank)
+ Estimate profit margin
========================================
BASE RATE = 7.5%


All the other banks have followed the leader and have adjusted their base rate to be in the same range by playing around with either unallocated costs or estimated profit.

Below is the list of Banks with their respective base rates.



However before the regime of base rate, the AAA corporates used to get loans at around 6.5%. So will this affect the corporate borrowing. To deal with this the banks may lend money to AAA corporates through commercial paper or give them higher rate of interest on their deposits.