Reserve Bank of India has assured that there would not be an effective rise in the cost of borrowings with the implementation of base rate.

"There is some apprehension that the base rate system may raise the effective cost of borrowings. This is unlikely because corporates have access to multiple sources of funds and hence the effective borrowing rates will be determined by market competition," said RBI executive director Deepak Mohanty.

A survey conducted by corporate lobby, Ficci last week said that the cost of borrowings would increase for high rated companies from banks with the implementation of base rate.

"This, along with other measures taken by RBI for financial inclusion, will draw borrowers away from the informal financial sector and towards the formal financial sector and facilitate credit penetration," Mohanty said.

It was the working group under the chairmanship of Mohanty which had prescribed the implementation of base rate over BPLR system of lending.

Mohanty said that base rate would bring transparency regarding relative efficiency and cost structure of banks.

Lack of transparency was one of the major factors for BPLR giving way to base rate system of lending. "Competition in an environment of excess liquidity had forced the pricing of a significant proportion of loans far out of alignment with BPLRs undermining its role as a reference rate.

Furthermore, there was a growing public perception of under-pricing of credit for corporates and over-pricing of credit to agriculture as well as small and medium enterprises," he said.