The Base Rate is the minimum lending rate, below which, a bank can not lend excluding some exceptions allowed by apex bank RBI in India w.e.f. 01.07.2010. RBI has exempted banks’ own employees loans, loans against deposits, loans to small-ticket borrowers under the differential interest rate scheme, agricultural loans, export loans and viable re-structured loans from base rate bindings. For above category bank can lend below the base rate.

The formula for calculating the base rate will take into account the cost of deposits, cost of complying with CRR and SLR requirements, and the need to retain a profit margin. Plus there will be a markup depending on the cost of operation for a particular type of product and premiums for credit risk and tenor of loans. This method is clearly more scientific than the present system for calculating BPLRs.

The base rate, which will replace the current system of benchmark prime lending rate, would improve transparency. The BPLR system has been drawing flak from various quarters since banks have been lending to highly-rated corporates below their benchmark rate, making the system irrelevant and opaque.

According to RBI, all categories of loans would be priced only with reference to the Base Rate.