Answer =

a) Cost plus loan pricing method=

Cost plus loan pricing method states that all the expenses or costs associated with providing loans (short term and long term loan) to the customers must be calculated before fixing the interest rate and payment.

The following are the components of cost plus pricing method :

1 )Marginal cost of raising funds = It refers to the additional cost incurred by banks for financing one more dollar of funding. Banks obtain such funds either through customer deposits or various money market instruments.

2)Bank operating costs = Operating costs are the expenses involved in working of banks. It include the operating cost of assisting loans. For example , Bank wages and salaries, application processing, payment processing, facilities maintainence and legal services provided by banks.

3 ) Margin requirement by bank to compensate for default risks = Risk premium are paid by customers in order to compensate for the degree of default risk included in providing loans to customers.

4 )Profit margin required by banks = The margin is calculated on each loan that is provided by banks. So that banks can earn  adequate return on its capital.

b) Base lending rate =

Base lending rate is the minimum rate below which a bank can not lend to its customers .Base lending rate is set by Reserve Bank of India. It was introduced in July, 2010.

Determination of base rates =

Banks can set the base rate as per the norms given by RBI. Usually, banks have to consider components for setting the base lending rate. These components include marginal cost of raising funds, non- fund operating expenses, profit and margin requirements by banks. In 2016 , RBI introduced MCLR (Marginal cost of fund based lending rate) in place of Base lending rate. Base rate differ from bank to bank due to differences in interest rate. RBI has also set various norms for interest rates so that bank can not charge higher cost from their customers for granting loans. Introduction of norms for interest rate calculation helps in keeping the interest rate of all banks competitive or similar .

Hence interest rate is the biggest factor that determine the Base lending rate .