New Base Rate to replace banks' BPLRs from 1 April

The Reserve Bank of India (RBI) has issued a draft circular on the new Base Rate system that would replace the current base prime lending rate (BPLR) system followed by banks in the country.

The `Base Rate' system will replace the BPLR system with effect from 1 April 2010. Banks have to base their actual lending rates for both loans and advances on the Base Rate beginning the next fiscal, the RBI said.

The Base Rate will have all elements of the lending rates that are common across all categories of borrowers.

While each bank may decide its own Base Rate, the RBI said, the criteria for determining the Base Rate should be: cost of deposits, adjustment for the negative carry in respect of CRR and SLR, unallocatable overhead costs of banks such as aggregate employee compensation relating to administrative functions in corporate office, directors' and auditors' fees, legal and premises expenses, depreciation, cost of printing and stationery, expenses incurred on communication and advertising, IT spending, and cost incurred towards deposit insurance and profit margin.

The RBI has illustrated the method of computing the Base Rate in the annex to the circular.

The actual lending rates charged to borrowers would be the Base Rate plus borrower-specific charges, which will include product-specific operating costs, credit risk premium and tenor premium, RBI said.