The draft guidelines released on Tuesday said all banks, starting from April next year, should calculate their base rates based on marginal cost of funds, instead of average cost of funds, in order to improve policy transmission. Photo: Mint
The draft guidelines released on Tuesday said all banks, starting from April next year, should calculate their base rates based on marginal cost of funds, instead of average cost of funds, in order to improve policy transmission. Photo: Mint

Crisil says new lending rate method will lower banking system’s base rate by 50 bps

For every subsequent 25 basis point cut in deposit rate, banks' profits will be impacted by `5,000 crore in a year from the rate cut

Mumbai: Rating agency Crisil Ltd. said the new methodology of calculating base rate, or minimum lending rate, as proposed by the draft guidelines of Reserve Bank of India will lower banking system’s base rate by 50 basis points, or half a percentage point.

“Our base-case is that profitability of banks will have a one-time impact of around 20,000 crore in fiscal 2017, which would be equal to 15% of the total estimated profit of the banking system for that year," said Pawan Agrawal, chief analytical officer of CRISIL Ratings in a statement.

Further, for every subsequent 25 basis point cut in the deposit rate, profits will be impacted by 5,000 crore in a year from the rate cut. One basis point is 0.01 percentage point.

The draft guidelines released on Tuesday said all banks, starting from April next year, should calculate their base rates based on marginal cost of funds, instead of average cost of funds, in order to improve policy transmission.

Marginal cost of funds is linked directly with the prevailing market rate and fluctuates with every rate action taken by the central bank. Hence, the policy transmission is faster.

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