However, the BPLR system failed to bring transparency in the lending rates of the banks. The calculations of BPLR is not that transparent and sometimes the banks under this system could lend to customers below the BPLR. So, Base Rate was introduced subsequently.
Base rate is the minimum interest rate of a bank, below which it cannot lend, except for DRI allowances, loans to bank's own employees and loans to bank's depositors against their own deposits. The base rate system has replaced the BPLR from July 1, 2010. Since then the BPLR is gradually losing its importance except for the loans taken before July 1, 2010. In such cases, RBI has allowed to continue with BPLR at which the loans were approved. They were, however, given the option of switching to the base rate before the expiry of their loans.
RBI does not fix the base rate. Individual banks fix their own base rates and so each bank has its own base rate. The calculations of base rate involve elements which can be clearly identified and are common across buyers. Banks have to declare their respective base rates in the website in order to make lending more transparent.
Click here to read what are the differences between Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)?
According to RBI policies, banks have to revise their base rate at least once every quarter. However, banks can review the base rates more than once a quarter. After doing the required calculations banks decide whether to enforce the new rate or carry on with the existing one.