Monday, February 2, 2015

Base Rate

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Base Rate System
Bank lends money to its customers by loans or advances or other credit facilities. It charges some interest on the lending credit. Does a bank need to follow any specific rules while providing money to its customers?

Yes, banks follow Base rate system, formulated by RBI. Base rate is the minimum chargeable interest for the credit sanctioned to the customer (meaning, no bank can offer loans to its customers below this interest rate).

Base rate system replaced the Benchmark Prime Lending Rate (BPLR) system on July 1, 2010.


Situational Question
Suppose you are an officer in a rural bank. A poor people comes in your branch seeking loan for his house (or some other reason). Can you offer him a loan, bearing interest below the Base Rate?

The answer is YES, if he is eligible for DRI scheme. (criteria described below)


Exclusions
There are some few exclusions, where you can grant loan below base rate, as -
  1. Differential Rate of Interest (DRI) Scheme beneficiaries
  2. Loans to bank's own employees (including retired employees)
  3. Loans to bank's depositors against their own deposits (e.g., granting loan on his own fixed deposit, etc.)

DRI Scheme
As per RBI guidelines, for lending under DRI scheme, banks are required to grant loans at concessional rate of interest to the eligible beneficiaries -
  • Family income ceiling per annum in rural and urban area should be less than Rs. 18,000 and Rs. 24,000 respectively
  • Borrower should not be benefited under any subsidy-linked schemes of government
  • Max. limit of loan - Rs. 15,000. For housing loan, it could be up to Rs. 20,000
  • Banks are required to lend 1 % of their total outstanding advances under DRI Scheme every year.


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