- Lending Rate:
- Marginal standing facility:
- Statutory Liquidity Ratio
- Cash Reserve Ratio
- REPO Rate
- During inflationary situation, an increase in Repo rate by RBI, will inhibit banks from borrowing money from RBI (since they will have to pay more interest). This results in reducing the money supply in the economy and bringing inflation under control.
- When there is an economic slowdown, lowering the Repo rate makes borrowing cheaper for banks, which leads to increased money supply in economy, thereby stimulating economic activity and growth.
- Any Change in Repo rate influences the money supply in the economy.
- Reverse REPO Rate
In Indian banking context, Lending rate is the interest rate that banks charge the borrowers for loans. Terms that are interchangeably used are Loan rate, borrowing rate, Credit rate and finally the most popular alternate name being base rate.
History of Lending rates
Historically, the Indian banking system used several benchmarks to determine lending rates. It is the respective bank that set lending rates, but within a framework regulated by RBI to ensure transparency.
At present, the interest rate charged to borrowers are typically benchmarked to MCLR or EBLR. Regardless of what they are linked to, Lending rate set is the minimum rate below which banks cannot lend to the customer.
| Benchmark rate | Period |
|---|---|
| Benchmark Prime Lending Rate (Banks set rates based on internal policies. Full discretion) |
April 2003 - June 2010. |
| Base Rate (Regulated, standardised & based on quarterly average) |
July 2010 - Mar 2016 |
| Marginal Cost of Fund based Lending Rate (MCLR) (based on latest cost of funds) |
April 2016 - Present |
| External Benchmark lending Rate (EBLR) (linked to external benchmarks like REPO rate) |
October 2019 - Present (most active) |
External Benchmark lending Rate
EBLR — currently the most active lending rate, is the lending rate linked to an external benchmark rate.
EBLR = Any 1 out of the 4 external benchmark rate + spread.
The external benchmark rates are:
- RBI Repo rate
- GOI 3-Months Treasury Bill yield rate
- GOI 6-Months Treasury Bill yield rate
Any other benchmark market interest rate, published by the FBIL(Financial Benchmark India Ltd).
Floating interest rate based personal loans, retail loans and loans to small businesses will be linked to EBLR. Banks have the choice to adopt EBLR to other category of loans too. Banks can choose any one out of the four external benchmarks. Over this, credit spread is added to arrive at EBLR rate.
What is Spread?
Spread is determined by the respective bank. It takes into consideration borrower-level credit risk and bank-level business strategy.
Spread= Credit risk premium + business strategy premium.
What is credit premium?
The credit premium is charged based on borrower's credit risk assessment. It can be changed, if there is significant change in credit assessment of the borrower. Business strategy premium indicates the bank's pricing decision and it varies based on their market positioning and business objectives.
It is a facility made available by RBI to scheduled commercial banks to deal with short term liquidity mismatch, particularly when other form of borrowing options including inter bank liquidity are exhausted completely.
What is Liquidity mismatch?
Mismatch between deposits and loan portfolio, resulting in emergency cash crunch situation. Eg. Situation where there is unexpected huge surge in cash withdrawals.
Borrowing period:
Borrowings under MSF are usually for very short term period typically overnight/one day period, where banks borrow by pledging government securities with RBI, at a borrowing rate higher than the repo rate.
Ceiling:
Borrowing limit under MSF is 1% of bank's net demand and time liabilities, subject to a overall limits of SLR and minimum amount for borrowal is Rs.1 Crore and multiples of 1 Crore
As of August 2024, the MSF rate is 6.75%
Statutory Liquidity Ratio refers to the percentage of bank's Net demand and time liabilities (NDTL) that commercial banks need to maintain/keep with themselves, in their own vaults in the form of liquid cash, gold and unencumbered approved securities, before offering credit to customers. SLR is fixed by RBI.
Purpose : Purpose of SLR is to ensure that banks always have enough money to meet their customer demand and other contigencies. Is an important tool to control money supply in the economy.
Maximum limit for SLR is 40%. As of August 2024, the SLR is 18%.
Scheduled commercial banks in India have to maintain with RBI a cash reserrve ie in the form of liquid cash, a sum equivlent to certain percentage of bank's Net demand and time liabilities in India, as of last friday of the previous reporting fortnight. Regional rural banks and NBFC are exempted from maintaining CRR.
Note: Prior to the recent amendment in 2025, CRR was calculated based on NDTL as of second Friday of the preceding fortnight.
Sub-requirements :For the purpose of maintaining CRR, every scheduled bank is required to maintain a Principal Account with the Deposit Accounts Department (DAD) of the Reserve Bank at the centre where the principal office of the bank is located.
Bank shall maintain a minimum CRR of not less than 90% of the required CRR, on all days during the reporting fortnight. So that, the average of CRR maintained daily shall not be less than the CRR prescribed by the Reserve Bank.There is no upper cap for CRR
Purpose : Purpose of CRR is to ensure that banks don't run out of cash to meet the customer deposit obligations. It is a tool to control liquidity in banking system and money supply in the economy. It is to be noted that RBI does not pay any interest on the CRR balances maintained by SCBs.
As of August 2024, the CRR rate is 4.5%
Repo stands for repurchase option or repurchase agreement. During liquidity crisis following volatile market conditions, commercial banks resort to borrowing from RBI to handle their short term financial needs, against the securities. Repo rate is the rate at which the funds is lent by RBI.
Banks sell the securities and bonds to RBI with an agreement to repurchase these securities at a predefined price higher than the initial selling price, after a specified period. Securities sold under repo arrangement include government bonds, treasury bills, corporate bonds, asset-backed fixed income securities, and equity securities.
Repo rate in india as of August 2024 is 6.5%
It's the opposite of repo rate. Reverse repo rate is the interest rate that RBI offers to commercial banks to park their excess funds with RBI for short period (for few weeks). It is a part of Monetary policy used by RBI to absorb excess liquidity from the banking system and control the flow of money in the market.
Increasing Reverse repo incentivizes SCBs to park their excess fund with RBI, reducing excess money circulating in the economy, consequently helps in controlling inflation
Reverse Repo rate in india as of August 2024 is 3.35%