Base Rate, How is MCLR different from Base Rate

Have you been wondering how MCLR is different from Base Rate? The most important thing is that MCLR is set by the banks following the structure as well as methodology. It could be said that MCLR is indeed a sort of improved way of the base rate. It is called a risk-oriented way to determine the final lending rate for the borrowers. RBI is responsible to set a fixed internal reference rate for banks.

The banking system is so vast and there are so many terms to understand. Now, we are going to understand a bit about the base rate in a detailed manner.

Base Rate And The Way To Calculate

The factor cannot be ignored that the financial sector in India has truly undergone a variety of reforms in the past few years. Taking about one of the excellent outcomes, banks are imparting the freedom to go with interest rates on their own following the RBI guidelines. It means banks can go ahead to set and alter the interest rate along with considering the RBI guidelines. Here, it needs to be mentioned that the base rate is one of the new age reforms that RBI introduced.

A Bit About Base Rate

To put it in simple words, it could be said that the Base Rate is regarded as the minimum interest set by RBI. It means it is required to follow and Indian Banks are not allowed to permit lending its customers below that set guidelines indeed. Following the RBI rule is important and any bank cannot introduce loans at an interest rate lower than the specific base rate.

It was introduced in July 2010 and it could be said that base rate is a standard lending rate introduced by commercial banks. The motto of introducing a base rate means it is all about increasing transparency so that banks pass the advantage of lower interest rates to borrowers.

Base Rate, How is MCLR different from Base Rate ?

How To Calculate Base Rate

RBI calculates the based rate. The country’s central banking regulatory body is responsible to bring uniform rates which are needed to be followed by all Indian banks. It does not matter if that bank is national or private sector related. The motto of Base Rate is all about encompassing all sorts of elements of lending rates which are regarded quite common among borrowers related to different categories indeed.

Talking about base rate calculations, there are many factors to consider indeed. It also includes the cost of deposits, administrative costs, what profitability of the bank went in the previous financial year, the unallocated overhead, and some other important factors. Here, it needs to mention that the maximum weight goes on the deposit cost. Banks hold the required freedom to consider the deposit's cost following different tenures while calculating the base rate.

Internal reference rates for banks are set by the RBI. Banks use the interest rate which comes under RBI to define the minimum interest rate applied in the context of different loan types. RBI updates the rate every once in a while if any sort of drastic alteration in the country’s economic activities. Banks are generally not allowed to lend money below the expected guidelines indeed. That reference rate is regarded as MCLR and banks cannot go below that at all.

What Are The Prominent Factors Determining The Base Rate

Have you been wondering what could be the prominent factors to find out the Base Rate? It has already been mentioned that every bank comes up with the freedom to determine the base rate so long as it goes with the guidelines as well as norms introduced by the RBI. Talking about the RBI guidelines, the base rate is quite important to consider all the important elements regarding the lending rates which are quite common regarding the different borrower’s categories.