Towards inclusion

Now,prime borrowers who will be charged a percentage point or two above the base rate may end up paying more for a loan than they did under the old prime lending rate system. That is not necessarily as bad as it sounds. That is because large firms have other options to borrow cheaply,by issuing commercial paper or by accessing money markets abroad. Quite to the contrary,smaller enterprises and individual retail borrowers can neither issue commercial paper nor borrow overseas. So,this significant group of aam borrowers

depends heavily on the commercial banking system,which gave them a raw deal until now.

Under the new base rate system,however,banks will not be able to charge exorbitant rates many percentage points above the needlessly high prime lending rate. With the base rate as the new benchmark,costs of borrowing for this group will come down while becoming more transparent. The base rate system will also trigger competition between banks to offer cheaper rates. The ability to offer cheaper rates will depend on the ability to mop up more deposits remember the base rate is linked to cost of deposits which falls as scale increases. That should help the cause of financial inclusion as well.