On the last working day of every quarter, the central bank sets the rate for the next three months by taking an average of the base rates of the country’s five largest commercial banks.
The Reserve Bank of India (RBI) has set at 8.12 percent the average base rate to be charged from borrowers by non-banking financial companies (NBFCs) and micro-finance institutions (MFIs) for the quarter beginning October 1, 2020.
The central bank on the last working day of every quarter sets the rate for the next three months taking an average of the base rates of the country’s five largest commercial banks.
But, smaller MFIs have been asking the RBI to make the calculation broad-base by taking into consideration a wider set of banks and NBFCs. This is because smaller MFIs get loans at a higher rate.
"The base rate calculation needs to go beyond five big banks to a wider set of lenders. This will make the average base rate more realistic," said P Satish, executive director at Sa-Dhan, a lobby of microlenders.
MFIs are institutions that source funds from banks and then lend to smaller borrowers. While bigger MFIs get cheaper loans from banks, smaller ones with a lower rating typically pay more.
In a circular issued in February 2014, the RBI had said the interest rates charged by an NBFC-MFI will be lower of the cost of funds plus margin or the average base rate of the five largest commercial banks by assets multiplied by 2.75.The RBI introduced the base rate system to bring in more transparency in the interest-rate setting process. Base rate is the minimum rate at which lending institutions can give loans. They typically charge other components above the base rate to arrive at the final lending rate.