How RBI's New Base Rate Works For Loan(lending rate)

Have you seen huge difference in loan interest rate between new customers and existing customers.Existing customers pays loan at very high interest rate. 

This is happening because of old BPLR system which failed to bring transparency in lending rates charged by banks.

So,  RBI has recommended Base Rate for lending rate  which will replace BPLR system from 1st JULY 2010.This will be no lending below rate base for any customer.

What is the reason this change?

Interest rates is big factor for credit quality and financial stability for entire economy. These rate should  be mutually realistic  and beneficial for banks and borrowers.

How Base Rate works?

Now Banks are expected to decide their actual lending rates using the base rate as a reference from july. The actual lending rate decided on case basis w hich takes into account the base rate plus charges specific to the individual borrower based on his credit profile, loan eligibility and other criteria relevant to lending norms practiced by the banks. This can only be equal to or above the base rate and never below it as per the recommendation.

The bank will calculate base rate based lending rates, different segments of borrowers, deposit rates, mandatory cash requirements, profit margins, and other bank specific factors.

How it will help customers?

Also, existing borrowers and new borrowers may still have a certain degree of difference in their respective lending rates. This base rate will bring transparency in the retail and corporate lending market. This would create awareness for the borrower who will evaluate his/her loan cost better based on the base rate of the bank.

This move of base rates will lead to competition among banks. This is so because the base rates will be known to everybody.

For Example, The base rate of Bank B1 is 6% and base rate of Bank B2 is 6.5%. When you approach bank B2 then suppose they will offer loan at base rate+2 = 8.5%.You can ask Bank B2 that Bank B1 is offering base rate +1.5 =7.5% for your loan.

So, They may give additional discounted loan rate if they really want do business with customers.

No Bank can lend lower than base rate for any customer so there will not be huge differance between new and existing customers.

So, lets welcome RBI’s move and hope it gets success incoming days.