Base Rate

What is Base Rate? Definition of Base Rate, Base Rate Meaning

Know All Details About Base Rate

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What is the Base Rate?

Base rate is the minimum rate at which a commercial bank in India is allowed to offer a loan to a borrower, as per RBI guidelines. This along with the credit risk premium decides the cost of the loan. All commercial banks in India have the freedom to decide their respective base rates as per the duration of the loan, considering rules and regulations framed by the RBI. While a bank has the autonomy to zero upon a minimum lending rate, no bank can offer a loan that is lower than this benchmark interest rate i.e., base rate.

Introduction of the Base Rate

Now that you know the base rate definition, let us see how it came into effect. The RBI introduced the base rate as the standardized rate of lending for all banks in India on July 1, 2010. Loans that were approved as well as those up for renewal after this date could be switched to the new base rate system. However, banks also had the option to continue with the Benchmark Prime Lending Rate (BPLR) for loans taken by borrowers before July 1, 2010.

Current Base Rate of Banks

For the year 2022, the current base rate of banks has been revised as follows:


Current Base Rate

Bank of Maharashtra


RBL Bank


Axis Bank


Canara Bank




Andhra Bank/Union Bank


Dhanlaxmi Bank


SBI (State Bank of India)


Karnataka Bank


Kotak Mahindra Bank




Bank of Baroda


PNB (Punjab National Bank)


Union Bank of India


Syndicate Bank/Canara Bank


Corporation Bank/Union Bank


Bank of India


Oriental Bank of Commerce/PNB


Punjab & Sind Bank


Catholic Syrian Bank


Disclaimer: However, one must remember that the interest rates mentioned here are subject to constant change. Bajaj MARKETS advises its readers to always check the prevailing interest rates before applying.

Why was Base Rate Introduced?

As you can see from the base rate meaning itself, it was a measure taken by the RBI for increased transparency, clarity and removal of disparity in the lending process. The BPLR system that was operational before the introduction of the base rate had led to non-uniform lending rates by banks. This is because under the BPLR system banks could fix the rate of interest in consultation with their boards.

However, there were no restrictions on lending at a rate below the BPLR which led to inconsistencies in different loan rates. For instance, while low-risk customers such as corporates were offered loans at a rate below the BPLR, salaried and other individuals had to pay the usual lending rate. Removal of BPLR and adherence to base rate definition has brought about a reform in the banking system by setting a standard for the rate of lending without bias. The benefits have been directly transferred to you, the borrower who is no longer in the dark about the interest policy of a bank when you apply for a loan.

Difference between Base Rate and BPLR

BPLR system allowed banks the flexibility to offer varying interest rates to their customers. The rate at which a bank was interested to lend money to its different customers was defined as the Benchmark Prime Lending Rate. There was no standardisation in the process and hence lack of transparency on how a bank arrived at BPLR for a borrower.

However, the base rate definition establishes it as the threshold interest rate as mandated by the RBI below which a borrower cannot be provided with a loan. Clarity in base rate meaning has brought in more objectivity to the lending process by standardizing the lending rate across all authorized financial institutions. This has helped to do away with favouritism during loan approval process with individuals from all financial backgrounds having access to a fixed and transparent interest rate when applying for a loan.

Base Rate Calculation

After knowing in detail what is the base rate and how it came into effect, it is time to move on to how it is calculated. As you know already, each bank has a unique base rate that it arrives at in line with the RBI regulations. Computation is done based on lending rate factors that are common to all lender categories such as:

  • Fund cost or rate of interest of the deposit

  • Minimum profit rate

  • Operating expenses

  • CRR (Cash reserve Ratio) cost

Among all the above, the cost of deposits holds the most value in the base rate calculation and a bank may take a call on which loan’s cost of deposit it would want to consider to compute the base rate.

Base Rate Modification

Since April 1, 2016, all Indian banks have started following the Marginal Cost of Funds based lending system which uses the MCLR method to calculate the base rate. This method is more dynamic since banks are required to update MCLR every month. Here are a few components used in the calculation of MCLR:

  • Cost of operation

  • Tenor premium

  • Marginal cost of funds

  • Negative CRR carry on amount

This methodology makes use of the marginal cost to compute the cost of the funds. The marginal cost is in turn calculated by using the bank repo rate and other additional costs involved in fund acquisition.

Applicability of the Base Rate

  • The primary function of the base rate is to ensure transparency in the pricing of lending products. Thus, the base rate must be known via all branches and on the bank’s official website.

  • The Reserve Bank of India (RBI) has set a base rate for each loan category. This base rate must be followed by banks when pricing a loan. However, there are some categories like DRI advances, bank employee loans, and depositor loans that may be priced without following the base rate. 

  • When the base rate is modified, the change applies to all loan categories that are associated with the current base rate. 

  • The base rate is set at a minimum by the apex Indian bank. Thus, banks are not permitted to set an interest below the set rate.

  • Banks must review the base rate in each quarter. It is a mandatory action that should be taken upon the approval of the ALCOs (Asset Liability Management Committees) or the board. 

  • Modification in the base rate should be conveyed to the general public immediately. 

  • Banks must offer details to the RBI regarding the applicable minimum and maximum lending rate through quarterly reports.

How Does Base Rate Affect Corporate Borrowers?

Large corporations enjoyed rates as low as 3% to 6% during the BPLR (Benchmark Prime Lending Rate) system. However, since the introduction of the base rate, banks are not allowed to lend a loan with an interest rate that is lower than the base rate.

How Does Base Rate Affect the Retail Customers?

The effect of the base rate on retail customers is subjective. Depending upon the present rate of interest, the rate could either increase or decrease by 25 basis points compared to the present interest rate. You must, however, note that the change will not have an impact on the interest rate of existing customers.

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