Question

The base rate is the minimum interest rate of a bank below which it is NOT permissible to lend, except in some cases if allowed by the ______.
1. NITI Aayog
2. Reserve Bank of India
3. CAG
4. Supreme Court

Answer 1

Correct Answer - Option 2 : Reserve Bank of India

The Correct Answer is "Reserve Bank of India".

• The Base Rate is the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI.
• It is the minimum interest rate of a bank below which it is not viable to lend.
• The base rate, introduced with effect from 1st July 2011 by the Reserve Bank of India, is the new benchmark rate for lending operations of banks.
• Thus all categories of domestic rupee loans should be priced only with reference to the Base Rate, subject to the conditions mentioned in RBI circulars dated April 9, 2010 and January 19, 2015.
• The reason for introducing Base Rate was to bring out the transparency in bank lending rates as well as to improve monetary policy transmission.
• Since the Base Rate will be the minimum rate for all loans, banks are not permitted to resort to any lending below the Base Rate.

 

• Base Rate replaced the benchmark prime lending rate (BPLR) ,the interest rate which commercial banks charged their most credit worthy customer.
• Following the announcement in the Annual Policy Statement for the year 2009-10, a working group was constituted under the chairmanship of Shri Deepak Mohanty to review the benchmark prime lending rate.
• It was observed that the benchmark prime lending rate, which was introduced in 2003, had failed in its objective.
• The banks were lending below BPLR rates due to competitive pressures.
• For the same reason, it was also difficult to assess the transmission of policy rates of the Reserve Bank to lending rates of banks.
• Hence a need was felt for transition to a more transparent and effective interest rate mechanism.