What is base rate and premium rate?

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Nepal Rastra Bank is now preparing to fix the premium on the interest rate of the loan. The premium is being set so that no bank can cheat customers in interest. What is a premium? NRB has already fixed the base rate for banks and financial institutions to determine the interest rate on loans. Banks have been fixing the interest rate by adding some premium to the base rate and fixing the interest with the bank debtors.

However, recent developments at NIC Asia Bank have shown that banks and financial institutions are raising interest rates by charging high premiums. The bank’s high interest rates frightened customers. The interest charged by the bank went beyond imagination. The strategy of the bank was to auction the assets at the beginning by charging low interest and later charging high interest. That is why NRB is preparing to fix the premium.

Now the central bank will also determine the premium to be added to the base rate. After the premium is added to the base rate, the bank will not be allowed to raise the interest of the borrower. If the base rate of a bank is 6 percent, then the bank can collect premium according to the customer and risk.When the base rate is 6, adding 5 percent premium is 11 percent. At present, the NRB is preparing to fix the premium at 5 percent. Earlier, premium rates were not fixed for banks. Only the base rate was fixed. NRB is preparing to fix the premium rate saying that the bank has created a new way to get interest by adding more premium when the base rate is

The base rate is the main basis for determining the interest rate of a bank loan. Banks can set interest rates by adding premium to the base rate. Banks and financial institutions have to determine the interest rate of the loan while disbursing the loan to their customers. No bank or financial institution is allowed to charge interest rate higher than the base rate. The interest rate of the loan is linked to the base rate. The base rate always fluctuates in three months. The base rate is not the actual interest rate of the loan flow but only the basis for determining the interest rate.

The base rate does not go up or down today. When there is a lack of liquidity in the market, interest rates on both loans and deposits rise. Whether the interest rate goes up or down depends on the deposit. How easy is the deposit? If it comes in a big way, then the interest rate of the loan will also come down.

There are four components to calculating the base rate. The biggest component is the cost of funds. Cost Of Fund is the interest paid by the depositors. If the deposit situation becomes comfortable tomorrow, it will have a direct effect on the base rate and the base rate will fall. When this happens, the interest rate on the loan also decreases automatically.

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