Banks follow varying methodologies. Some use the average cost of funds method, some have adopted the marginal cost of funds way while others use the blended cost of funds (liabilities) method.
How will it be done after April?
The RBI wants adoption of the marginal cost of funds methodology. Cost of funds is the pivotal factor influencing the base rate. The banking regulator has proposed that banks should arrive at cost of borrowing by factoring in average rates at which they had raised funds in the past one month prior to the date of reviewing the base rate. Marginal cost of funds will consist of current and savings deposits, fixed deposits, borrowings from RBI and other institutions as well as bonds.
How will borrowers benefit?
The RBI and some industry-watchers believe that base rates linked to marginal cost of funding will be more transparent and ensure effective transmission of RBI's policy measures to borrowers. Interest rate resets could become more frequent. At present, banks often do not pass on benefits of the central bank's rate cuts to the borrowers. CRISIL says the new methodology could reduce the current level of base rates by around 50 bps.
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