What is Base Rate?

HDFC Bank and Canara Bank on Tuesday lowered their lending rates by up to 0.35 per cent, a move that will make home and other loans cheaper for consumers. HDFC Bank lowered its Base Rate by 0.35 per cent to 9.35 per cent — the lowest in the industry; Canara Bank cut its minimum lending rate by 0.10 per cent to 9.90 percent.

Third largest private lender Axis Bank cut its deposit rates by up to 0.50 per cent across maturities. A cut in deposit rate is generally considered a precursor for reduction in lending rates. In its monetary policy review on August 4, RBI Governor Raghuram Rajan had rued that banks had lowered their rates by only 30 basis points despite the central bank having cut its benchmark rate by as much as 75 basis points since January.

100 basis points are equivalent to one percentage point. Base Rate is the minimum rate below which banks are not permitted to lend. The Base Rate was introduced in the Indian banking system on 1st July 2010 to replace the flawed benchmark prime lending rate (BPLR), which was introduced in 2003 to price bank loans on the actual cost of funds.

It includes all those elements of the lending rates that are common across all categories of borrowers. A host of factors, like the cost of deposits, administrative costs, a bank’s profitability in the previous financial year and a few other parameters, with stipulated weights, are considered while calculating a lender’s BR. There can be only one Base Rate for each bank.

Following categories of loans could be priced without reference to Base Rate: DRI Advances; Loans to banks' own employees including retired employees; and Loans to banks' depositors against their own deposits. In case of restructured loans, if some need to be granted below the Base Rate for the purpose of viability, and there are recompense etc. caluses, such lending will not be constructed as a violation of the Base Rate guidelines.

Cases where interest rate subvention or refinance is available include some types of crop loans, export credit, financing of Off-Grid and Decentralised solar applications, financial assistance under micro credit scheme ST and Handicapped Finance and Development Corporations, financial assistance under schemes of National Safai Karmacharis Finance & Development Corporation, lending to Primary Agricultural Credit Societies etc.