Understanding RBI Banking Terms

Understanding RBI Banking Terms

Important Banking Terminology

Bank Rate

• Bank Rate is the rate at which the central bank of the country (e.g., RBI in India) allows finance to commercial banks. Bank Rate is a tool that the central bank uses for short-term purposes.

• Any upward revision in Bank Rate by the central bank is an indication that banks should also increase deposit rates, as well as Base Rate/Benchmark Prime Lending Rate.

• Thus, any revision in the Bank rate indicates that it is likely that interest rates on customers' deposits are likely to either go up or go down, and it can also indicate an increase or decrease in customers' EMI.

Basis Points

• It is the increase in interest rates in percentage terms.

• For instance, if the interest rate increases by 50 basis points (bsp), then it means that the interest rate has been increased by 0.50%.

• One percentage point is broken down into 100 basis points. Therefore, an increase from 2 to 3% is an increase of one percentage point or 100 basis points.

LRR (Legal Reserve Ratio)

• LRR includes CRR and SLR.

CRR (Cash Reserve Ratio)

• CRR is the amount of funds that the banks have to keep with the RBI.

• If the 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.

SLR (Statutory Liquidity Ratio)

• SLR is the amount a commercial bank needs to maintain in the form of cash or gold or government securities. Approved securities (Bonds) before providing credit to its customers.

• SLR rate is determined and maintained by the RBI in order to control the expansion of bank credit. With the SLR, the RBI can ensure the solvency of a commercial bank.

• SLR is used to control inflation and propel growth. Through the SLR rate, the money supply in the system can be controlled effectively.

Repo Rate

• Repo rate is the rate at which commercial banks borrow rupees from the RBI.

• A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases, borrowing from the RBI becomes more expensive.

Reverse Repo Rate

• Reverse Repo rate is the rate at which the RBI borrows money from commercial banks.

• Banks are always happy to lend money to the RBI since their money is in safe hands with a good interest rate.

• A rate increase in the reverse repo rate can cause the banks to transfer more funds to the RBI due to the attractive interest rates. The Reverse Repo Rate is always 1 percent less than the Repo Rate.

NEFT (National Electronic Fund Transfer)

• NEFT enables funds transfer from one bank to another, but it works a bit differently from RTGS. NEFT is slower than RTGS. The transfer is not direct, and RBI acts as the service provider to transfer the money from one account to another. You can transfer any amount through NEFT, even a rupee.

National Electronic Fund Transfer (NEFT) Details

• NEFT began operations on November 21, 200,5, with one settlement a day, in which only eight banks had participatedSubsequentlyly, 216 banks participated with settlements progressing to half-hour batches from 8 am to 7 pm.

• NEFT handles, on average, 10.5 million transactions daily with an average value of around Rs. 80,000 crore.

• About 57% of the retail payment systems, in terms of value, as of October 2019, went through the NEFT system, according to the RBI data.

• The average ticket size for NEFT in October 2019 was over Rs. 76,500 as compared to Rs. 8,900 (IMPS) and Rs. 1,660 (UPI), respectively.

• Effective July 1, 201,9, the RBI had waived processing charges for transactions processed in NEFT.

• From December 16, 2019, the facility got activated and banks have started offering their customers round-the-clock NEFT services, except for a half an hour break after midnight in some cases.

RTGS (Real Time Gross Settlement)

• RTGS system is a funds transfer system where transfer of money or securities takes place from one bank to another in 'real time' and on a 'gross' basis.

• Settlement in 'real time' means the payment transaction is not subject to any waiting period. The transactions are settled as soon as they are processed.

• Minimum & Maximum Limit of RTGS: 2 lakh and no upper limit.

Liquidity Adjustment Facility (LAF)

• Liquidity Adjustment Facility is a monetary policy tool that 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.

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. MSF is always 1 percent more than the Repo Rate.

Nostro Account

• A Nostro account is maintained by an Indian Bank in a foreign country.

Vostro Account

• A Vostro account is maintained by a foreign bank in India with its corresponding bank.

CRAR (Capital to Risk Weighted Assets Ratio)

• Capital to risk weighted assets ratio (CRAR) is arrived at by dividing the capital of the bank by aggregated risk weighted assets for credit risk, market risk, and operational risk.

SDR (Special Drawing Rights)

SSDRare is a new form of International reserve assets, created by the International Monetary Fund (IMF) in 1967. The value of SDR is based on the portfolio of widely used countries, and they are maintained as accounting entries and not as hard currency or physical assets like Gold.

Bond

• Publicly traded long-term debt securities issued by corporations and governments, whereby the issuer agrees to pay a fixed amount of interest over a specified period of time and to repay a fixed amount of principal at maturity.

Non-Performing Assets (NPA)

• An asset (loan), including a leased asset, becomes non-performing when it stops generating income for the bank.

Note: Once the borrower has failed to make interest or principal payments for 90 days, the loan is considered to be a non-performing asset.

Final Thoughts

The banking system uses several important terms that explain how money is managed in the economy. Bank Rate, Repo Rate, and Reverse Repo Rate are key tools of the Reserve Bank of India (RBI) to control borrowing costs and liquidity. Ratios like CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) ensure banks remain stable while keeping inflation in check.

For everyday transactions, systems like NEFT and RTGS allow safe transfers between banks, while newer options such as IMPS and UPI make instant payments possible. Tools like LAF (Liquidity Adjustment Facility) and MSF (Marginal Standing Facility) help banks manage short-term fund needs.

Internationally, Nostro and Vostro accounts support foreign trade, while the IMF’s Special Drawing Rights (SDR) act as global reserve assets. Instruments like bonds and the concept of Non-Performing Assets (NPA) highlight how investments and loan repayments affect the strength of banks and the overall economy.