1. Base rate is the minimum rate set by the Reserve Bank of India below which banks are not allowed to lend customers.
2. Loan pricing will be done to customers by adding certain percentage of risk premium called as spread to the base rate depending upon on the credit risk of the customer.
3. Even though banks have its own discretion in deciding the interest rates, it should satisfy the minimum criteria set by the RBI.
4. Base rate was introduced by RBI in July 2010. Now base rate is modified by RBI with MCLR in determination of base rate. According to which, banks have to revise their base rate according to the marginal cost of lending rate (MCLR) on a daily basis.
5. The base rate differs from bank to bank. The following are the factors will determine the base for the bank.
1. Cost of raising the funds
2. Expected rate of return by the bank
3. Cost to meet RBI requirements like CRR (Cash Reserve Ratio)
4. Business operating expenses