BASE RATE

Base Rate is the interest rate below which scheduled commercial bank cannot lend to their customers. It was recommended by Deepak Mohanty Committee.

Its main Aim is to ensure transparency in lending rates and enabling better assessment of transmission of monetary policy. To ensure that both Corporate And Small And Medium Business Get Money At Low Rates. So that it helps in monetary transmission (i.e.) Rate reduction by RBI directly passes through all section of the society.

Base rate is determined on the basis of a bank’s cost of funds which include Cost Of Deposits, Profit Margins, Operating Expenses, Administrative And Statutory Expenses. Since the base rate will be the minimum rate for all loans, banks are not permitted to resort to any lending below this rate.

The Base Rate as on March 2020 is in the range of 8.15 to 9.40%.

MARGINAL COST OF FUNDS BASED LENDING RATE: (MCLR)

      It refers to the Minimum Interest Rate of a bank below which it cannot tend except in some cases allowed by the RBI. It is an internal bench mark or reference rate for the bank.  Minimum Interest Rate for loan is determined by bank and it is decided on the basis of marginal cost or additional cost or incremental cost of arranging one more rupee to the prospective borrower.

It was introduced in 2016 as a new method to compute the bank’s lending rate.

REASON FOR INTRODUCING MCLR:

Rates based on marginal cost of funds are more sensitive to changes in the Policy Rates. Improve the transmission of policy rates into the lending rates of banks. The computation of interest rates will be more transparent.

Cost of loans will be fair. The banks can become more competitive and enhance their long run value.