Question on different types of Bank Rates

1. What is a 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 against the pledge of government securities, to meet their day-to-day obligations. Repo rate is used by monetary authorities to control inflation. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases, borrowing from RBI becomes more expensive

2. What is Reverse Repo Rate?
This is exact opposite of Repo rate. Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. RBI uses this tool when it feels there is too much money floating in the banking system. Banks are always happy to lend money to RBI since their money is in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to attractive interest rates.

3. What is CRR Rate?
Cash Reserve Ratio (CRR) is a certain percentage of the total bank deposit has to be kept in the current account with RBI which means banks do not have access to that much amount for any economic activity or commercial activity. Banks can’t lend the money to corporate or individual borrower; banks can’t use that money for investment purposes. So, that CRR remains in current account and banks don’t earn anything on that.

4. What is SLR Rate?
Statutory Liquidity Ratio (SLR) is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the expansion of bank credit. SLR is determined as the percentage of total demand and percentage of time liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their anytime demand. SLR is used to control inflation and propel growth.
Through SLR rate tuning the money supply in the system can be controlled efficiently.

5. What is Bank Rate?
Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on the loans and advances that it extends to commercial banks and other financial intermediaries. Changes in the bank rate are often used by central banks to control the money supply.

6. What is PLR?
Prime Lending Rate is the interest rate charged by banks to their most credit-worthy or favoured customers (usually the most prominent and stable business customers). The rate is almost always the same amongst major banks. The banks are at liberty to lend at a rate above or below the PLR. The PLR is usually adjusted at the same time and in correlation to the adjustments of the Fed Funds Rate. The rates reported below are based upon the prime rates on the first day of each respective month. Some banks use the name "Reference Rate" or "Base Lending Rate" to refer to their Prime Lending Rate. It is treated as a benchmark rate for most retail and term loans.

7. What is Deposit Rate?
In deposit terminology, a term Deposit Rate refers to the amount of money paid out in interest by a bank or financial institution on cash deposits. Banks pay deposit rates on savings and other investment accounts. Deposit accounts include certificates of deposit, savings accounts and self-directed deposit retirement accounts.

8. What is BPS (Basis Points)?
Basis point (BPS) refer to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001), and is used to denote the percentage change in a financial instrument. The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point.
So when we say that repo rate has been increased by 25 bps, it means that the rate has been increased by 0.25%

9. What is Base Rate?
It is the minimum rate of interest that a bank is allowed to charge from its customers. Each bank can determine their base rate in accordance with the norms given by the RBI.
According to the RBI, Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers.
The base rate may differ from one bank to the other. But the following four components usually determine the base rate of particular bank. These components are:

  1. Cost for the funds (interest rate given for deposits),
  2. Operating expenses,
  3. Minimum rate of return (profit), and
  4. Cost for the CRR (for the four percent CRR, the RBI is not giving any interest to the banks)

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Question on different types of Bank Rates