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May 20, 2012

Base Rate - Bench Mark Prime Lending Rate


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In this post we shall discuss two very important banking terms which are useful for Banking Exams. Those are Base Rate and Benchmark Lending Rate. Lets start with the definitions first.

BPLR (Benchmark Prime Lending Rate) :

The BPLR is the rate of interest at which commercial banks can lend money to EACH OTHER and to some large corporations. It is called benchmark rate or benchmark lending because it is commonly used to calculate other rates of interest.

Base Rate :

The Base Rate is the minimum interest rate for any bank. I mean, the bank cant lend you money for an interest less than this Base Rate (you may assume that this is the Base of the Interest, so that you can call it as Base Rate). Ofcourse, some exceptions are also there. RBI allowed some cases where Banks can lend amount for interest below the Base Rate except for DRI advances, They are loans to bank's own employees and banks' depositors against their own deposits etc.

Ofcourse, now a days we are not using the benchmark lending or BPLR process as the Base Rate Concept came into the limelight. The BPLR is slowly becoming less concerned and is made applicable normally only on the loans which have been sanctioned before the Base Rate has been made compulsory. But ofcourse, it is important for us as, we being bank exam aspirants, should learn everything about BPLR :)

Difference between BPLR and Base Rate :

A committee of RBI reviewed benchmark prime lending rate (BPLR) and introduced Base Rate to replace the benchmark lending rate. The main difference between BPLR and Base Rate is transparency . When compared to BPLR, the Base Rate is much more transparent and banks are not allowed to lend below the base rate (except for cases specified by RBI as mentioned in the above definition). Base Rate is to be reviewed by the respective banks at least on quarterly basis and should announce for public. On the other hand, the calculations of BPLR was mostly not transparent and banks were frequently lending below the BPLR to their prime borrowers and also under pressure due to various reasons.

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  1. mam i cant understand the difference b/w bplr and base rate can u explain

    1. Assume that you and your family give loans to others under an organization named "Priya's Finance Company". You represent Gujrat, your elder brother represents Delhi and younger one represents some Hyderabad (nationalized banks).

      Usually you put some interest rate for all the people who borrow money from you. What will you do if one of your friend come to you and ask you for money? Because she is your friend, you may reduce the rate of interest for her. The same thing may happen with your brothers too (Base Rate).

      Now your father (RBI) came to know about this and to make things under control, he madkes a SPECIFIC INTEREST RATE (BPLR) and Order you people NOT TO lend money to anybody without the interest rate specified by him... Thats it :)

      Hope it helped

      Good Day

    2. superb example,i understand the concept clearly,thank you..

  2. vry clear xample mam...

  3. Excellent site...thank youuuuuuuu!!!

  4. good example.....thank u.

  5. superb example mam


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