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Sunday, August 29, 2010

New Bank Base Rate System

Whenever a person borrows money from the bank there is an interest rate that the borrower has to pay to the lender. The base rate is the minimum rate of interest that the bank will lend money at and the borrower has to pay.

It can be considered as a basic rate of interest on which the actual rate a bank charges on loan to its customers is calculated.

So the base is the standard rate set by banks on the basis of the guidelines issued by RBI. Loans are given above the standard base rate to the borrowers and according to their credit ranking.

The RBI has given guidelines to banks to adjust their base rates from July 1, 2010, according to the prevailing market conditions and interest rate policies. Banks will update their base rates every few months if that is required. Banks can then communicate this to all their borrowers. So the base rate won’t be fixed forever.

The most important thing to keep in mind is the cost of money should not change. i.e., if the car loan cost about 12% or home loan cost 9%, this rate of interest charged to you will be no different going forward.

It is just the method used to explain about the rate fixed by the bank so as to ignore the bargaining by the borrowers. So we can say that the interest rates aren’t coming down as a result of this base rate implementation.

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