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RBI proposed marginal cost of funds methodology to calculate Base Rate

Sep 2, 2015 10:06 IST

The Reserve Bank of India (RBI) on 1 September 2015 proposed a new methodology to calculate Base Rate (Base Rate). It is based on marginal cost of funds methodology.

The new methodology is aimed at bringing uniformity among BRs of banks so that they will be more sensitive to any changes in policy rates of the RBI like Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), etc.

At present, banks are following different methodologies in computing their BR like on the basis of average cost of funds, marginal cost of funds or blended cost of funds (liabilities).

Under the proposed methodology, the components of BR will include cost of funds, negative carry on CRR/SLR, un-allocable overhead costs and average return on net worth.

The new methodology is expected to come into effect from 1 April 2015.

Base Rate

• It is defined as the minimum interest rate of a bank below which it is not viable to lend.
• It was introduced on 1 July 2011 by the RBI.
• It replaced the benchmark prime lending rate (BPLR), the interest rate which commercial banks charged their most credit worthy customer.

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