Base Rate vs BPLR
Base Rate vs BPLR Rate
BPLR is the Benchmark Prime Lending Rate and is the rate at which banks in the country lend
money to their most credit worthy customers. Till now, RBI had given liberty to the banks to fix
their BPLR and different banks do have different BPLR causing resentment among customers. Add
to it the practice of banks to provide loans at a much higher rate than their BPLR and it completes
the misery of the common people. Keeping all this in mind, RBI has suggested the use of a Base
Rate in place of BPLR from July 1, 2011 that will be applicable to all banks across the country. Let
us understand the differences between BPLR and Base rate in detail.
Though all banks have a BPLR, it has been seen that they charge a higher rate of interest on home
loans and car loans from customers. In some cases, the difference between BPLR and the rate of
interest charged by the bank is as much as 4%. There is no mechanism at present to educate a
customer about BPLR and the rate at which he is being offered a loan and why there is a difference
between the two rates. Though BPLR, also known as prime lending rate or simply prime rate, was
originally meant to bring transparency in the system of lending, it was seen that banks began to
misuse BPLR as they were at a liberty to set their own BPLR. It became difficult for a customer to
compare BPLR of different banks as all had different BPLR. Another point of resentment is that
when RBI reduced its prime lending rate, banks did not automatically followed suit and continued
to lend money at a higher rate of interest.
It became clear to RBI that BPLR system was not functioning in a transparent manner and
complaints of consumers were increasing in an exponential manner. This is why, RBI, after
studying the recommendations of a study group has decided to enforce a Base Rate instead of
BPLR from July 1, 2011. The difference between BPLR and Base Rate is that now the banks are
given parameters like cost of funds, operational expenses, and a profit margin that banks have to
provide to RBI as to how they arrived at their base rate. On the other hand, though there were
similar parameters in case of BPLR also, they were in less detail and also RBI did not have the
power to scrutinize BPLR of the banks. Now the banks will be forced to follow a consistent method
of calculation as against arbitrary methods they chose while calculating BPLR.
Earlier banks gave loans to blue chip companies at rates even lower than their BPLR and
compensated by giving loans at higher rates to common consumers but now they have been asked
not to give loans at a rate lower than the Base Rate. All this obviously means the system of Base
Rate will be more transparent than BPLR system.
BPLR Rate vs Base Rate
BPLR is Benchmark Prime Lending Rate which is set by banks to lend money to customers.
Banks gave loans at even lower than BPLR to blue chip companies while charged higher
rate of interest from common people.
This is why RBI has decided to scrape the BPLR system and introduced a Base Rate that
will be applicable from July 1, 2011
Base rate will bring transparency in the loan segment as banks cannot give loans at rates
lower than Base Rate.
For detailed RBI Circular, please click here.
In September 2015, RBI proposed for changes in the formula in calculation of Base Rate. The
proposed guidelines requires Banks to follow the "marginal cost of funds" method for Base Rate
computation from April 1, 2016 onwards. Experts expect that if these guidelines are implemented,
it could dent the profitability of the Banking Sector since reduction in Base Rate would lead to
lower Return on Assets (RoA). CRISIL Ratings has gone ahead and quoted that the profitability of
Banks in 2017 may have a one-time impact of Rs.20000 crore in 2017.
In the monetary policy on Sept 29, 2015, RBI lowered the Repo Rate by 50bps as against the
market expectation of 25 bps. This move was applauded by all the section of the economy.
However, it was also encouraging to note that Banks were also quick in announcing reduction in
Base Rate following a cut in Base Rate. Few Banks who cut base rate are as under:
with effect
Bank Base Rate
from
State Bank of
9.30% Oct 5, 2015
India
Andhra Bank 9.75% Sept 29, 2015
ICICI Bank 9.35% Oct 5, 2015
Axis Bank 9.50% Oct 5,2015
Punjab National
9.60% Oct 1,2015
Bank
Bank of Baroda 9.65% Oct 5, 2015
Oriental Bank of
9.70% Sept 30, 2015
Commerce