EDEN IAS

BANKING RELATED TERMINOLOGY| GS ARTICLES

Syllabus section: Economy/ GS Paper III

 

REPO RATE:

  • Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds.
  • Repo rate is used by monetary authorities to control inflation

REVERSE REPO RATE:

  • The reverse repo rate is the rate at which RBI borrows funds from commercial banks.
  • It is the rate at which commercial banks in India park their excess money with RBI usually for the short term.

CASH RESERVE RATIO (CRR):

  • CRR or cash reserve ratio is the percentage of total deposits that banks are required to keep in reserves with RBI so that the same can be given to bank’s customers if the need arises.
  • Banks do not get any interest on this money.
  • It is one of the major weapons in RBI’s arsenal that allows it to maintain a desired level of inflation, control money supply and liquidity in the economy.
  • The lower the CRR, the higher liquidity with banks, which in turn goes into investment and lending and vice-versa.

STATUTORY LIQUIDITY RATIO (SLR):

  • It is a quantitative monetary policy instrument of the RBI.
  • Under SLR, commercial banks have to keep a certain proportion of the Net Demand and Time Liabilities (NDTL) as liquid assets in their own vault.
  • Liquid asset includes assets in the form of cash, gold and approved securities (government securities).

MARGINAL STANDING FACILITY (MSF):

  • Marginal Standing Facility is an overnight liquidity support provided by RBI to commercial banks with a higher interest rate over the repo rate.
  • MSF can be used by a bank after it exhausts its eligible security holdings for borrowing under other options like the LAF repo.
  • Usually, when banks need short term loans from the RBI, they pledge their security holdings that are above the SLR holdings with the RBI to get one day loans under repo.
  • Under MSF, a bank can borrow one-day loans form the RBI, even if it doesn’t have any eligible securities excess of its SLR requirement (maintains only the SLR).
  • The MSF was introduced by the RBI in its monetary policy for 2011-12.
  • The RBI, as a temporary measure, had increased the borrowing limit of scheduled banks under the marginal standing facility (MSF) scheme from 2 per cent to 3 per cent of their Net Demand and Time Liabilities (NDTL) or deposits from March 27, 2020.

LIQUIDITY ADJUSTMENT FACILITY (LAF):

  • Liquidity Adjustment Facility is a Monetary Policy tool that helps banks to borrow money via repurchase agreements.
  • To adjust the everyday mismatches in the liquidity, LAF is a useful.
  • The major elements of LAF are repo & reverse repo. The minimum bidding amount is Rs. 5 crores.
  • Repo Rate is a primary tool used in the monetary policy in India by RBI. There are other rates like Marginal Standing Facility Rate, SLR, CRR are often directly linked with the Repo Rate of RBI.
  • The RBI introduced the LAF as part of the outcome of the Narasimham Committee on Banking Sector Reforms of 1998.

BANK RATE:

  • Bank rate is the rate of interest that a Central bank (RBI in India) charges on the loans and advances to a commercial bank.

MARGINAL COST OF FUNDS BASED LENDING RATE (MCLR):

  • MCLR is an acronym for the Marginal Cost of Funds based Lending Rate. It replaced the Base Rate system from April 2016. (Base Rate is the minimum rate, as set by the RBI, below which banks are not allowed to lend to its customers).
  • MCLR is a tenor- based internal benchmark lending rate, instead of a single rate. The banks can now price their loans, as per their funding composition and strategies on different MCLRs.
  • Banks need to review and publish their MCLR monthly.