BASE RATES – Components | Calculation | Need
Reserve Bank of India (RBI) proposed the base rate system to replace the prime lending rate (PLR) for banks which takes effect from 1st April to bring about more transparency in the lending operations. The base lending rate reflects the actual cost to banks that has to be covered through lending. PLR proved ineffective as banks disbursed loans at sub-PLR rates to their privileged customers.
know About What is Base Rate
RBI’s definition of base rate has 4 components
- cost of deposits
- negative carry on CRR and SLR
- overheads cost and,
- returns on net worth
The above formula and numbers for 2008-09 has resulted in computation of base rate for a set of banks. The base rate varies from 5.22% for Citi to 8.91% for OBC. Roughly speaking, foreign banks have the lowest rate followed by public sector banks and then private banks. Currently PLR is 11-12%, so the difference is of 3-7% points, which is noteworthy.
But the base rate calculation has been arrived excluding a provision for NPAs (Non-performing Assets). The ratio of gross NPA to total advances varies between 1% and 2% points for banks, which when included pushes the base rate between 6.5% and 11%.
It is difficult to fix the components as past profit ratio is not appropriate indication for future as each bank makes an effort to increase it. So is the case with the overhead costs, the SLR and CRR and the cost of deposits – as these are all variable.
The need for substitution of PLR is essential because banks sanction numerous loans at sub-PLR making the BPLR (benchmark prime lending rates) irrelevant. Housing loans are usually issued at sub-PLR while there are others which are fixed by RBI and linked to the PLR such as farm loans or export finance. Now final lending rate for customers will be the base rate, plus the risk-cost attached to the credit rating perception of the borrower by the bank.
