Base Rate System in Indian Banks: An Analysis

This paper analyses the Base rate structure which is followed by commercial banks in India from July 2010 as per the directions of RBI. It makes a comparison of the Benchmark Prime Lending Rate (BPLR) regime and the new Base rate regime and the related pros and cons of both the bases of lending rate mechanisms. As the BPLR system fell short of its original objective of bringing transparency in lending rates, RBI introduced the Base rate system. The latter is aimed at enhancing transparency in lending rates of banks and proper transmission of monetary policy. The study computes the Base rates for a sample of 68 banks as per the formula given by RBI and compares them with Base rates declared by the respective banks. The study reveals that banks are setting their Base rates below their Break-Even Base rate to attract high value business to counter stiff competition in the banking industry.