Frequently Asked Questions
The prime lending rate is the minimum loan rate banks offer to their most trusted customers with a strong credit profile. It acts as a base rate for various loans like:
Home
Personal
Business loans
Other borrowers are charged this rate plus an additional amount (called a spread). The calculation of spread depends on their creditworthiness. The PLR is set by banks and changes based on the cost of funds and other financial factors.
The prime rate is the basic rate used by banks as a starting point. It is used to set the actual lending rate. The interest rate you, as a borrower, pay is usually the “prime rate plus a margin”.
Now, this margin depends on various factors, such as your:
Credit score
Income stability
Repayment history
The repo rate is the rate at which the RBI lends money to commercial banks. On the other hand, the prime lending rate is the minimum interest rate offered by banks to their customers with high creditworthiness.
When the repo rate increases, banks’ borrowing cost increases. To compensate, they raise their prime lending rates.
So, you can observe that the repo rate affects banks, and the prime lending rate affects regular loan customers.
Most banks and NBFCs offer the prime lending rate to borrowers with strong credit histories, such as:
Large profitable companies
High-net-worth individuals (HNIs)
Individuals with high credit scores
That’s because these borrowers are considered low-risk, so banks offer them the lowest possible interest rates. Please note that the prime rate also acts as a base for other loans. Most regular borrowers usually pay the prime rate + spread.
As of December 15, 2024, the State Bank of India (SBI) maintains its benchmark prime lending rate at 15.15%. This is the rate offered to the bank’s most creditworthy customers. The rate has remained steady for the past three quarters. The last revision was made on March 15, 2024, when SBI increased the rate by 15 basis points (0.15%).
In India, each commercial bank sets its own prime lending rate based on internal factors like:
Cost of funds
Expenses
Target profit
Market conditions
However, the Reserve Bank of India (RBI) influences the PLR through the repo rate. For those unaware, it is the rate at which the RBI lends to commercial banks. So, while banks decide the final PLR, the RBI indirectly guides it through its monetary policy.
Is the Prime Lending Rate applicable to all types of home loan in India?
No, the prime lending rate is not used for all home loans in India. It mostly applies to loans from Non-Banking Financial Companies (NBFCs) and some private banks.
For home loans, most public sector banks now use the:
MCLR (Marginal Cost of Lending-based Rate)
or
Repo Rate-linked systems
So, whether PLR applies depends on the lender and the type of home loan product offered.
The prime lending rate is used as a base rate for several types of loans, such as:
Credit cards
Auto loans
Lines of credit
Personal loans
Home loans, and more
It is mainly offered to customers with good credit scores. However, not all loans are linked to PLR. Some loans (particularly in public sector banks) follow other systems like MCLR or repo-linked rates instead of the PLR.
India’s prime lending rate (PLR) is generally higher than that of many developed countries. For example, as of December 2024, the PLR of SBI is 15.15%, whereas US Bank’s PLR stands at 7.50%.
This increase is due to factors like:
Inflation rates
Cost of funds
Monetary policy decisions
However, direct comparisons are difficult because each country has its own method of calculating benchmark rates. Also, central banks follow different rules. This further makes it hard to compare PLRs across countries in a uniform way.
