RBI nod must to review base rate methodology after 5 years

The Reserve Bank of India (RBI) on Monday said banks that sought to review their base rate methodologies after five years of finalisation would need the central bank's approval for such exercises.

Base rate is the minimum rate at which a bank can lend. Banking executives said the implication of the revision in base rate norms was a bank would be able to consider a revision in methodology after 2015, subject to RBI's approval.

RBI said banks that started business after Monday's circular could revise the base rate methodology within a year from the date of commencement of their business in India.

A senior public sector bank executive said this was an enabling provision for banks to be set up under the new licensing regime.

RBI said banks were advised to switch to the base rate system for calculation of their lending rates with effect from July 1 2010. To provide some time to stabilise the system of base rate calculations, banks were allowed to change the benchmark methodology any time during the initial six-month period (till December-end 2010). Later, this was extended up to June 30 2011.

The central bank said banks that commenced operations in India after the base rate regime was implemented in July 2010 but didn’t complete a year of operations yet could revise the base rate methodology within a year from the date of commencement of operations.

RBI has received pleas from certain banks requesting these be allowed to change the base rate methodology on various grounds.