Important Banking Terminology

Important Banking Terminology:

1. Bank Rate: The interest rate at which at central bank lends money to commercial 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.
2. Liquidity adjustment facility (LAF) is a monetary policy tool which allows banks to borrow money through repurchase
agreements. LAF is used to aid banks in adjusting the day to day mismatches in liquidity. LAF consists of repo and reverse repo
operations.
3. Repo Rate: Whenever the banks have any shortage of funds they can borrow it form RBI. Repo rate is the rate at which
commercial banks borrows rupees from RBI. A reduction in the repo rate will help banks to get money at cheaper rate. When the
repo rate increases borrowing form RBI becomes more expensive.
4. Reverse Repo Rate: Reverse Repo rate is the rate at which RBI borrows money from commercial banks. Banks are always
happy to lend 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 encourages an organisation
to enter into reverse repo is that it earns some extra income on its otherwise idle cash.
5. CRR (Cash Reverse Ratio): CRR is the amount of funds that the banks have to keep with RBI. If RBI increases CRR, the available
amount with the banks comes down. RBI is using this method (increase of CRR), to drain out the excessive money from the
banks.
6. SLR (Statutory Liquidity Ratio): SLR is the amount a commercial banks 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 RBI in order to
control the expansion of the 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 banks 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.
7. Marginal Standing Facility (MSF): MSF rate is the rate at which banks borrow funds overnight from the Reserve Bank of India
(RBI) against approved government securities.