RBI proposes formula to calculate Base Rate

To bring in uniformity among banks for calculation of base rate and for effective transmission of policy rates, the Reserve Bank of India (RBI) on Tuesday proposed a formula to calculate the base rate for lending.

RBI suggested banks to consider marginal cost of funds to calculate individual lending rates.

RBI said that it would implement these proposals with effect from April 1, 2016. Banks were asked submit a road map clearly indicating the time frame for adopting these guidelines two months prior to the final implementation.

The components of Base Rate will include cost of funds, negative carry on CRR/SLR, un-allocable overhead costs and average return on networth.

“For monetary transmission to occur, lending rates have to be sensitive to the policy rate,” said RBI in the draft guidelines.

At present, banks follow different methodologies for computing their Base Rate. While some use the average cost of funds method, some have adopted the marginal cost of funds while others use the blended cost of funds (liabilities) method.

“It was observed that Base Rates based on marginal cost of funds are more sensitive to changes in the policy rates,” In the first Bi-monthly Monetary Policy Statement this fiscal the RBI had stated that in order to improve the efficiency of monetary policy transmission, it will encourage banks to move in a time-bound manner to marginal-cost-of-funds-based determination of their Base Rate.