Important Banking Terminology

 

The interest rate at which a nation's central bank lends money to domestic banks. Often these loans are very short in duration. Managing the bank rate is a preferred method by which central banks can regulate the level of economic activity. Lower bank rates can help to expand the economy, when unemployment is high, by lowering the cost of funds for borrowers. Conversely, higher bank rates help to reign in the economy, when inflation is higher than desired.

 

 

 

Repo rate is the rate at which our banks borrow rupees from RBI. Whenever the banks have any shortage of  funds they can borrow it from RBI. 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.

 

 Reverse Repo rate is the rate at which RBI borrows money from  commercial banks. banks are always happy to land money to RBI since their money is in the safe hands with a good interest. An increase in reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. One factor which encourage an Organization to enter into reverse repo is that it earns some extra income on it's otherwise idle cash.

 

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the  banks  comes  down.  RBI  is  using  this  method (increase of CRR rate), to drain out the excessive money from the banks.

 

SLR(Statutory Liquidity Ratio) 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.

Need of SLR: With the SLR, the RBI can ensure the solvency of a commercial banks. it is also helpful to control the expansion of the Bank credits. By changing SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR , RBI compels the commercial bank to invest in the government securities like govt. bonds.

Main use of SLR: SLR is used to control inflation and propel growth. Through SLR rate the money supply in the system can be controlled effectively.

 

Marginal Standing Facility (MSF) is the rate at which scheduled banks could borrow funds overnight from the Reserve Bank of India(RBI) against approved government securities



Why (MSF) is it required: Banks borrow money from RBI at MSF rate when there is an acute cash shortage or acute asset-liability mismatch. This does not carry any stigma.
Size of MSF:Minimum amount of Rs. One crore and in multiples of Rs. One crore thereafter.