Interest Rate Policy RBI – JAIIB Study Material

1. The Interest rate policy is issued in April. Bi Monthly reviews is undertaken by RBI.
2. RBI has deregulated interest rate on term deposits of banks except FCNR (B) deposits.
3. Interest rate on Domestic Saving deposits has been deregulated. It is decided by banks.
4. In respect of advances, RBI has deregulated interest except DRI where it is 4% p.a.
5. Interest rate on deposits and advances are decided by Board of Directors of Banks or by Asset Liability
Management Committee of the respective banks if powers delegated by Board.
6. Interest rates on advances are linked to Base of the Bank which varies from bank to bank.
7. RBI has asked banks to adopt concept of Base Rate instead of BPLR w.e.f. 1.7.2010.

BASE RATE
1. Base Rate concept has been introduced on the recommendations of Deepak Mohanty Committee.
2. Base Rate is the minimum rate below which banks will not lend to any borrower except in the case
of (a) DRI advances (b) loans to banks’ own employees (c) loans to banks’ depositors against their own deposits. Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers.
3. Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers like
(a)cost of funds
(b) Unallocatable Overhead Cost
(c) negative carry for SLR and CRR
(d) Average Return on Net Worth

4. Obiective of Base Rate:(i) Enhancing transparency in lending rates of banks (ii) Enabling better assessment of transmission of monetary policy.
5. The Base Rate system will replace the BPLR system with effect from July 1, 2010.

Cash Reserve Ratio
1. Scheduled Commercial Banks are required to maintain CRR as per section 42(1) of RBI Act.
2. Banks are required to maintain certain percentage of Net Demand & Time Liabilities as cash with RBI.
3. As per amendment to sub-section (1) of Section 42 of the RBI Act 1934, with effect from 15t April 2007,RBI can prescribe the Cash Reserve Ratio (CRR) for Scheduled Commercial Banks without any floor
rate or ceiling rate. Accordingly, there is no minimum or maximum CRR as per RBI Act and RBI will fixCRR.
4. Banks are required to maintain the prescribed CRR based on their NDTL as on the last Friday of thesecond preceding fortnight.
5. Banks are required to maintain daily average balance as fixed percentage of NDTL with RBI. The actual balance on any day of the fortnight (14 days) may be more or less than the required balance. However, cash balance with RBI on any day of the fortnight should not fall below 95% of the required average daily cash balance.
6. RBI will not pay any interest on the CRR balances with effect from 31″t March 2007.
7. If a bank fails to maintain 95% of required balance with RBI on any day of the fortnight, RBI will charge penal interest for that day at the rate of three per cent per annum above the bank rate on the amount of shortfall. If the shortfall continues on the next succeeding day/s, penal interest will be recovered at a rate of five per cent per annum above the bank rate.
8. Reserve Bank of India has prescribed statutory returns i.e. Form A return (for CRR) under Section 42
(2) of the RBI, Act, 1934 to be sent fortnightly.

Statutory Liquidity Ratio
1. Statutory Liquidity Ratio is maintained as per section 24 of Banking Regulation Act.
2. As per amendment to section 24 of the. Banking Regulation Act, the provision relating to maintenance
of minimum SLR of 25% of NDTL has been withdrawn. Thus, RBI is free to fix minimum SLR. However, it can be increased to maximum of 40% of NDTL.
3. SLR can be kept in the form of
(a) cash
(b) gold valued at a price not exceeding the current market price,
(c) unencumbered approved securities valued at a price as specified by the RBI from time to time
(d) cash balance with other banks
(e) excess cash balance with RBI. Cash management bill issued by
Government of India will be treated as Government of India T Bills and accordingly shall be treated as SLR securities
4. For calculation of SLR, banks are required to send monthly statement on Form VIII under Section 24 of the BRAct.
5. If a bank fails to maintain SLR on any day of the fortnight, RBI will charge penal interest for that day at the rate of three per cent per annum above the bank rate on the amount of shortfall. If the shortfall continues on the next succeeding day/s, penal interest will be recovered at a rate of five per cent per annum above the bank rate.

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