BANK RATEThis is the rate at which central bank (RBI) lends money toother banks or financial institutions. If the bank rate goesup, long-term interest rates also tend to move up, and vice-versa. Thus, it can said that in case bank rate is hiked, inall likelihood banks will hikes their own lending rates toensure and they continue to make a profit.
CASH RESERVE RATIOCash reserve Ratio (CRR) is the amount of funds that the banks have to keep withRBI. If RBI decides to increase the percent of this, the available amount with thebanks comes down. RBI is using this method (increase of CRR rate), to drain outthe excessive money from the banks.RBI uses CRR either to drain excess liquidity or to release funds needed for theeconomy from time to time. Increase in CRR means that banks have less fundsavailable and money is sucked out of circulation. Thus we can say that this servesduel purposes i.e. it not only ensures that a portion of bank deposits is totallyrisk-free, but also enables RBI to control liquidity in the system, and thereby,inflation by tying the hands of the banks in lending money.
STATUTORY LIQUIDITY RATIOEvery bank is required to maintain at the close of businessevery day, a minimum proportion of their Net Demand andTime Liabilities as liquid assets in the form of cash, gold andun-encumbered approved securities. The ratio of liquid assetsto demand and time liabilities is known as Statutory LiquidityRatio (SLR).RBI is empowered to increase this ratio up to40%. An increase in SLR also restrict the bank’s leverageposition to pump more money into the economy.
Repo (Repurchase) rate The rate at which the RBI lends shot-term money to the banks. When the repo rateincreases borrowing from RBI becomes more expensive. Therefore, we can say thatin case, RBI wants to make it more expensive for the banks to borrow money, itincreases the repo rate; similarly, if it wants to make it cheaper for banks toborrow money, it reduces the repo rate Reverse Repo Rate is the rate at which banks park their short-term excess liquidity with theRBI. The RBI uses this tool when it feels there is too much money floating in thebanking system. An increase in the reverse repo rate means that the RBI willborrow money from the banks at a higher rate of interest. As a result, banks wouldprefer to keep their money with the RBI
PRIME LENDING RATEThe interest rate that commercial banks charge their best, most credit-worthycustomers. Generally a banks best customers consist of large corporations. Therate is determined by the Federal Reserves decision to raise or lower prevailinginterest rates for short-term borrowing. Though some banks charge their bestcustomers more and some less than the official prime rate, the rate tends tobecome standard across the banking industry when a major bank moves its primeup or down. The rate is a key interest rate, since loans to less-creditworthycustomers are often tied to the prime rate. Many consumer loans, such as homeequity, automobile, mortgage, and credit card loans, are tied to the prime rate.
Base RateIt is the minimum rate of interest that a bank is allowed to charge from its customers.Unless mandated by the government, RBI rule stipulates that no bank can offer loans at arate lower than BR to any of its customers.Base Rate System is for the banks to set a level of minimum interest rates charged whilegiving out the loans. This Base Rate System has many advantages over the older methodof Prime Lending Rate (PLR). One advantage is, in the Prime Lending Rate (PLR), onecould sanction the loan for lower price for the preferred customer or the corporate bodiesand retail customers may have to pay more for the same type of loans. In the base ratesystem, there will not be much variance on the loans.However, the base rate system will not be applicable for the following type of loans:•Agricultural Loans•Loans given to own employees•Loans against deposit•Export Credit.
HOW IS IT DIFFERENT FROM BANK PRIME LENDING RATE?BR is a more objective reference number than the bank prime lending rate(BPLR) -- the current benchmark. BPLR is the rate at which a bank is willing tolend to its most trustworthy, low-risk customer. However, often banks lend atrates below BPLR. For example, most home loan rates are at sub-BPLR levels.Some large corporates also get loans at rates substantially lower than BPLR.For all banks, BR will be much lower than their BPLR