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If you are happened to read the recent newspapers, it is most likely to read a
news talking about the   system for the banks. Every bank is
announcing the base rates for lending loans. From 1st July, 2010 banks have
moved to a base rate regime. Let͛s see what does this mean, what are its
implications and does this affect your borrowings.

Base Rate is the minimum rate of interest that a bank is allowed to charge
from its customers. RBI has stipulated that no bank can offer loans at a rate
lower than base rate to its customers. It basically acts as a floor below which
banks can͛t lend to its customers.

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
predicated weights, are considered while calculating any banks Base Rate. The
cost of deposits has the highest weight in calculating the new benchmark. This
is how the base rate is calculated.

Before setting the base rate system, banks used another rate system called
Benchmark Prime Lending Rate (BPLR) to set their lending rates. The problem
with this system is that banks changed this BPLR to lower level to offer
discounted lending rates for the borrowers. BPLR is the rate at which a bank is
willing to lend to its most trustworthy, low-risk customer. However, often
banks lend at rates below BPLR. Some large corporates get loans at rates
substantially lower than BPLR and the retail customers had to pay more to
compensate the banks losses.
So RBI is to trying to make the banking system much stronger after the global
financial crisis by introducing the base rate system. This is how banks can͛t
lend loans at a lower rate to its preferred customers also. So there will not be
much variance on loans amongst retail customers and corporate bodies which
is the ultimate aim of introducing Base Rate.

However, there is a chance that some corporates, with low-risk profile, would
get a lower rate under the new system as under the BR regime banks are
expected to take into consideration the risk levels of the borrower.

Another advantage of base rate system is that it is very transparent. Every

bank has to declare to the public how they calculated the base rate. Banks net
interest margin will be unaffected due to base rate. Banks can change this rate
every quarter, and also between the quarter.

The most important thing to keep in mind is that the cost of money is not
changing, i.e., if your car loan cost about 12% or home loan cost 9%, this rate
of interest charged to you will be no different going forward. It͛s just that the
method used to arrive at this will be clearer to you. So, interest rates aren͛t
coming down as a result of this base rate implementation .

However, the base rate system will not be applicable for the following type of
loans:

ͻ Agricultural Loans
ͻ Loans given to own employees
ͻ Loans against deposit
ͻ Export Credit

Each bank uses some criteria to set their base rates. Following are some of the
banks which have declared their Base Rates recently:
m

     
State Bank of India 7.50%
Punjab National Bank 8%
Bank of Baroda 8%
Union Bank 8%
Central Bank of India 8%
 Bank of Rajasthan 8%
Indian Bank 8%
Uco Bank 8%
IDBI Bank 8%
Indian Bank 8%
Dhanlaxmi Bank 7%
Federal Bank 7.75%
State Bank ofMysore 7.75%
Corporation Bank 7.75%
Karur Vysya Bank 8.50%
Canara Bank 8%
Indian Overseas Bank 8.25%
State Bank Of Bikaner and Jaipur 7.75%
South Indian Bank 8.10%
Karnataka Bank 8.75%
J&K Bank 8.25%
DBS Bank 7%
HDFC Bank 7.25%
Kotak Mahindra Bank 7.25%
ICICI Bank 7.50%
Deutsche Bank 6.75%

Source: www.moneycontrol.com

I hope this article would be useful to know the purpose of bringing the new
rate system into the banks. It is end of PLR and beginning of new rate system.
We have to wait and watch how the banks set their rates when there is any
change in the policy rates.

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