What is a base rate?

A base rate is the minimum rate of interest that a bank is allowed to charge from its customers. Unless mandated by the government, RBI rule stipulates that no bank can offer loans at a rate lower than the base rate to any of its customers.

Banks in India switched to base rate system from the erstwhile benchmark prime lending rate (BPLR) system from 1^st July 2010. Base Rate includes all those elements of the lending rates that are common across all categories of borrowers.

This leads us to what is a lending rate? A lending rate is the rate at which banks lend to their customers.  The actual lending rates charged to borrowers would be the base rate plus borrower-specific charges, which include product-specific operating costs, credit risk premium and tenor premium. So, it differs across various segments.

Base rate is linked to the cost i.e. average cost of deposit plus cost of intermediation. Hence base rates do not move in tandem with the changes in key rates by RBI.