The RBI or Reserve Bank of India controls monetary policies to regulate credit, banking and inflation in the country. In order to ensure a balanced supply of money, the RBI oversees the functions of financial institutions affecting the mandate on which you get loans and make investments. The rates decided by the RBI, including SLR, CRR, and repo rate, determines the interest that these institutions are eligible to charge on loans or offer for your savings. These rates have a direct impact on your Personal Loan interest rates, and thus your EMIs. Here’s everything you need to know about these terms.
Cash Reserve Ratio (CRR)
The full form of CRR is Cash Reserve Ratio. This term is used to define the cash reserve that the banks in India are supposed to maintain with the RBI. Every bank in India has a current account with the Reserve Bank of India. The deposits in this account are governed by the current CRR rate, which at present is 4%.
So, for example, when you deposit Rs.1,000 in your bank account, then with respect to the prevailing CRR rate of 4%, banks have to deposit Rs.40 with RBI. They cannot withdraw or use this money for commercial purposes and neither can they utilise this money for investment or lending. The remaining Rs.960 from your deposit may be used by them for lending or investment. Thus, the CRR rate determines the lending capacity of a bank. So, whenever the RBI reduces this rate, banks have more money to lend and vice versa.
Statutory Liquidity Ratio (SLR)
The SLR rate or Statutory Liquidity Ratio rate specifies the percentage of money that Indian banks are supposed to invest in Central or State Government securities. The current SLR is set at 19.5% per annum.
This means that if you put in Rs.1,000 in your bank account in a year then the bank, as per the SLR of 19.5%, has to set aside Rs.195 as investment in securities with RBI. Unlike CRR, banks earn interest on their yearly investment and can use this amount for developmental purposes.
Repurchase rate is better known as the repo rate. This is the interest rate charged by the RBI when it is lending money to banks. This lending process takes place in this format: When faced with a cash crunch, banks can pledge their government security investment folio to RBI to raise funds. In order to access funds, banks need to describe in written terms that they will buy back these pledged securities in the future at the price agreed upon previously. Generally, these loans have a short-term tenor. So, the higher the repo rate, higher the cost of short-term money is for banks. The current repo rate is 6.25%.
Reverse Repo Rate
The reverse repo rate is the rate at which commercial banks lend money to the RBI. Also, whenever banks have surplus funds in hand, which they are not keen on investment or lending, they can deposit it with the RBI for short periods. Based on reverse repo rate, banks earn interest on these deposits. RBI has currently set the reverse repo rate as 6%.
Now let’s take a look at the implications of these rates on your Personal Loan EMI.
A reduction in SLR, CRR, and repo rates increases the overall lending capacity of banks as they indicate a more robust cash flow with banks. If the RBI hikes the repo rate, banks may increase the interest rate charged to their Personal Loan customers. But this is subject to the lender’s profitability. If the lender has weaker profits, it is likely to pass on the burden of having to pay more to the RBI to the customer. In case the lender is making strong profits, it is likely to absorb the hike and will pass on the burden to the customer only if the repo rate continues to rise.
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