PLR (BPLR) Vs. The Base Rate Model:
In the old PLR model in place since 2003 we had Banks which had PLR of 11.50% some other had 12.50% and some had even 13.50 or 15.50%. From this there was a discount of 2 / 3 / 4 or 6% as the case may be to arrive at effective rates of 9.50%.
PLR was purely a Bank’s internal rate & there was no basis or a common denominator. When the markets went up all Banks increased their PLR and all customers moved to the higher rates. The real game was played when the markets went down. If the Bank had to give a lower rates due to market conditions they smartly increased the discount on the PLR keeping the PLR at the old rates. Hence old customers were still at higher rates whereas the new customers got the reduced rates benefits.
On 1st July 2010 RBI asked all banks to move to the Base Rate model. In the Base Rate model although all Banks are still free to have their Base rates & it varies from 9.25% (Multinational Banks) to 9.50%. But please note that the difference between banks is not 2/3/4 % but mere 0.1% to 0.2%. Also a Base Rate by definition is the Base Minimum at which a Bank will lend to any customer (including Big Corporates). Hence there is a common denominator. If any Bank has to be in the market they have to be competitive & hence the max difference in Base rates between banks will be Plus (+) or minus (-) 0.25%.