Base rate, CRR, Repo rate, MCLR, PLR, Reverse repo rate

BASE RATE

Base rate is the minimum lending rate set by a bank below which the bank can not lend out. This is used to price the loan products. This is based on the average cost of funds (The interest rates charged by banks on loan is greater than the interest rate that banks pay to hold the funds). Base rate is calculated on considering the profit margin. The purpose of base rate aimed in better pricing of loans, transparency, and transmission of monetary policy.

CRR

It is a part or portion of banks deposit which is required mandatorily to be maintained with the central bank. When there is an increase in CRR by the central bank of India, the cash balance reduces with the bank. The aim of the CRR requirement is to control the excess money supply in the market. The minimum requirement of CRR by scheduled banks with the central bank must be equal or greater than 4 % of the net demand and time liabilities. The CRR is an essential tool to control inflation by reducing the money supply and on another hand when the economic system runs through shortage of funds RBI decreases the CRR, thus banks have more cash reserves with them and become able to offer more loans.

REPO RATE  

It is the rate at which the Central bank lends money to banks. This is also an essential tool to control inflation as when there is a trend of inflation RBI increases the repo rate to reserve the excess borrowing by banks and this ultimately helps in reducing the excess money supply.  Increase and decrease in repo rate effects on determining the rate of interest by banks to borrowers.

REVERSE REPO RATE

It is the rate at which RBI borrows money from banks. It is short term in nature. When there is excess money flow in the banking system the central bank borrows the money to control the excess cash flow.

MCLR

The marginal cost of fund based lending rate is used by banks to determine the interest rate for the floating rate based loans.  This is based on the current cost of funds means the differences of the total deposits held with a bank minus Cash reserve ratio (CRR) that banks need to maintain the deposit with the central bank and remaining current cost is available to lend out. This rating system is considered on the basis of tenor, the more tenor the more risk in the long run. So the rating system is 1said to consist of components such as Marginal cost of funds, Cost of carrying on account of CRR, Operating cost, Tenor premium.

 The MCLR system replaced to the base rate system w.e.f 1st April 2016. The main purpose of MCLR is to keep transparency in transmitting the benefit of the cut in interest rate to borrowers.

PLR

The prime lending rate is used for fixing up the interest rate on floating rate loans. This is the minimum rate usually banks prefer for their prime customers. Interest rates are composed under this rate like PLR plus Spread

Base rate, CRR, Repo rate, MCLR, PLR, Reverse repo rate

Base rate, CRR, Repo rate, MCLR, PLR, Reverse repo rate

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