Base rate definition
It is pertinent to understand the base rate mechanism as wef 01 July 2010, all banks have been moved to base rate regime and to understand the definition of base rate we can state it as following :
When someone borrows money to buy car or house or electrical appliance or any thing else, there is an interest rate that one has to pay to the lender. The base rate is the minimum rate of interest that a bank will lend money at as per RBI guidelines. This is like floor interest rate below which RBI will not allow banks to lend money to any one.
Previously, banks used decide interest rates on the loans they offered, on a complicated system called benchmark prime lending rate (BPLR). Each bank has its own BPLR which is very difficult for borrowers to compare rates across banks. Now, with the base rate, it will be easier for everyone to compare across banks and to get a more transparent sense of how the interest rate for the loan is being arrived at and now RBI has given guidelines to banks to adjust their base rates depending upon the prevailing market conditions and interest rate policies.
You can learn more about the base rate by searching with following keywords on Google. This switch to base rate regime is going to bring more transparency in the banking system and issuance of the loans. This transition from BPLR regime to a base rate system of lending is a positive move.
