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Madhvi Bhatnagar
Asst. Professor
Department of Management
Aishwarya College of Education
0hat are Bank Rates / Lending
Rates?
£ The Cost of Money lent by banks and
financial institutions

£ Also known as Interest Rates

£ Includes Money Transferred between


Central Bank (RBI) and commercial Banks
Important Lending rates and ratios
£ Bank Rate
£ Prime Lending Rate (PLR)
£ Cash Reserve Ratio (CRR)
£ Repo Rate (RR)
£ Reverse Repo Rate
£ SLR
£ BPLR
£ Fixed Rate
£ Floating Rate
Bank Rate
£ It is the rate at which RBI allows finance to
commercial banks. It is used by central bank for
long--term purpose and is generally decided as per
long
the monetary policy of the country.

£ Any upward revision in Bank Rate by central


bank is an indication that banks should also
increase their Interest rate for customers

£ It is 6% at present
Prime lending Rate
£ The term originally indicated the rate of
interest at which banks lent to favored
customers
£ It is the benchmark interest rate on the basis
of which financial institutions decide the
interest rates on the various loan products
Prime lending Rate
£ For example, a bank might say a loan
interest rate will always be 0.5% above the
PLR. So this means if the PLR increases or
decreases by a certain amount, the interest
rates charged on the floating rate loans
offered by the bank also increase or
decrease by the same amount.
Cash Reserve Ratio (CRR)
£ It is the percentage of cash deposits that commercial
banks need to keep with the RBI on an everyday
basis.
£ The commercial banks can decide on the total
volume of credit to be provided to the customers,
only after maintaining the required level of Cash
Reserve Ratio.
£ RBI uses CRR either to drain excess liquidity or to
release funds needed for the economy from time to
time. Increase in CRR means that banks have less
funds available and money is sucked out of
circulation
Cash Reserve Ratio (CRR)
£ Increasing the CRR also means banks have
lesser money to lend. The RBI adjusts the
CRR to change the amount of liquidity in
the financial system, which helps to keep
the inflation within reasonable limits. Also,
when CRR is increased, the interest rates
also increase as the amount of liquidity in
the financial system decreases
Cash Reserve Ratio (CRR)
£ Presently the CRR in India is 6% w.e.f
24/04/2010

£ It means that all the banks of India have to


keep 6% of their Depositor's Money with
RBI in the form of cash. This is a way to
ensure the solvency of banks
Repo Rate (RR)
£ This is the interest rate at which RBI lends
money to the banks whenever they need to
borrow funds from the RBI. 0hen the repo
rate decreases its good news for the banks
as they can avail more funds at a lower
interest rate and vice versa.
£ This rate is 6.75% at present
Reverse Repo Rate
£ This means just the opposite! Here, the RBI
absorbs funds from the banks and when the
Reverse Repo Rate increases banks are very
happy to lend money to RBI because of the
attractive interest rates RBI offers to obtain
the loans

£ The rate is 5.75 % presently.


Reverse Repo Rate
£ By Increasing or decreasing this rate RBI
controls the availability of money in the
economy
£ Both RR and RRR are the measures through
which RBI regulates the liquidity in
banking system
SLR (Statutory Liquidity Ratio)
£ Every commercial bank needs to maintain a
certain amount or ratio of their Net Demand
and Time Liabilities with themselves in
some form, which includes cash, gold,
government bonds etc. before they can
provide credit to its customers..
SLR (Statutory Liquidity Ratio)

£ Presently it is 24% w.e.f 18/12/2010.

£ This Ratio helps RBI to have a control over


the bank¶s credit expansion, keeping it
realistic.
BPLR ± Benchmark Prime Lending
Rate
£ This is a reference interest rate that is used
as a benchmark to determine the interest
rate that is passed on to the customer. The
interest rate that is finally passed on to the
customer is X% plus or minus this
benchmark prime lending rate
BPLR
£ Suppose A took a home loan at a floating rate of
BPLR minus 2% at a time when the bank¶s BPLR
was 9%. The floating rate of 7% that he received
was attractive and it seemed to be the right
decision to choose this loan. Over time the BPLR
of the bank increased to 15% and A¶s floating rate
became13%. However, A¶s bank is now offering a
floating rate of BPLR minus 3.5% to new
customers, which means that new customers are
paying a rate of 11.5%, while A is stuck with an
interest rate of 13%.
Fixed rate and Floating Rate Loan

£ Loans on which Interest Rate remain fixed


over the period of time are fixed rate loans.
£ If rate of Interest changes with other bank
rates, it is floating rate of Interest.
£ Most commonly fixed rate is higher than
floating rate loans
Any Queries ??

THANKS