Base Rate System
Base Rate is the minimum lending rate that banks can charge their customers from July 1, 2010. Prior to this all lending rates were pegged to a Bank's Prime Lending Rate or PLR. The banks were charging the customers an interest rate which was either above PLR or below PLR, thus PLR serving as an anchor rate. From July 1, 2010, the Base Rate has not only replaced the PLR as a benchmark rate but has also become the new floor rate below which no bank can lend.
Please note that the outstanding loans that are linked to PLR would be continuing to be linked with the PLR, but the new loans and renewed loans would be linked to the sole benchmark that is Base Rate. The existing customers have been given a choice to migrate to Base Rate.
The introduction of the Base Rate aims at bringing the transparency in the lending market. The reasons were also to end the bargaining in the loans. For example, the banks charged much above the PLR from the risky and no bargaining customers, while the customers who have bargaining power were given loans well below the PLR. In some cases, at the PLR of 12-13%, the bargaining customers were given loans at 6-7%.
After fixing the floor rate i.e. the Base Rate, no bank would be able to lend below the Base Rate and this promises to bring transparency in the loan markets of the country.