# What is base rate? The base rate is the main basis for determining the interest rate of a bank loan. Banks can set interest rates by adding a premium of zero to 5 percent to the base rate. Banks and financial institutions should determine the interest rate on loans 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 every three months. This is going to happen automatically. Banks have no hand in this upside. The base rate is not the actual interest rate of the loan flow but only the basis for determining the interest rate.

Generally, the base rate for loans is plus one percent. Suppose at some point the base rate is 8 percent, then adding one percent gives 9 percent interest. If the base rate is reduced to 7, then it will be 8 percent again. Therefore, the illusion that banks reduce interest rates on deposits but not on loans is false.

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.

#### Method of calculating base rate:

The following method should be followed while calculating the base rate.
Base Rate = Fund Cost Percentage + Mandatory Balance Cost Percentage + Statutory Liquidity Cost Percentage + Operating Cost Percentage.

Categories: 