12.10         ndian    onom
           As per the RBI, ‘for monetary transmission                operations, which are used by banks for
     to occur, lending rates have to be sensitive to the             their day-to-day liquidity requirements.
     policy rate’. But this was not occurring by now.                One-fourth of the total amount of 0.75
     During 2015-16, the RBI reduced the policy                      per cent of NDTLs would be put up for
     rate (repo rate) by a total of 1.25 per cent. But               auction in each of the four auctions, RBI
     in comparison, banks reduced the lending rate                   said in a statement.
     by maximum 0.6 per cent. By now, banks have
                                                                     No change in the amount that banks
     been using either of the following three methods to
                                                                     can access from the liquidity adjustment
     compute their Base Rate:
                                                                     facility (LAF) window at fixed repo rate
          (a) average cost of funds,
                                                                     of the time. Banks are currently allowed
          (b) marginal cost of funds, or                             to borrow up to 0.25 per cent of their
          (c) blended cost of funds (liabilities).                   deposit base or NDTL from the LAF
           As per the RBI, the MCLR will bring in the                window.
     following benefits:                                             Additionally, RBI conducts overnight
               transmission of policy rate into the                  variable rate repo auctions based on an
               lending rates of banks to improve;                    assessment of liquidity in the system and
               computation of the interest rates by banks            government cash balances available for
               will get more transparent;                            auction for the day.
               cost of loan will be fairer to the borrowers          The LMF is aimed at reducing volatility
               as well as the banks.                                 in the call rate. Better interest signalling
               it will help the banks to become more                 and medium-term stability in the loan
               competitive and enhance their long-run                market are other objectives of it.
               value.
           The present MCLR of banks is 7.65–7.80 per         natIonalIsatIon and develoPMent
     cent (March 2018).                                       oF BankIng In IndIa
        revIsed lMF                                         The development of banking industry in India
                                                            has been intertwined with the story of its
     In August 2014, the RBI announced a revised
                                                            nationalisation. Once the Reserve Bank of India
     Liquidity Management Framework (LMF) as
                                                            (RBI) was nationalised in 1949 and a central
     a way to check volatility in the inter-bank call
                                                            banking was in place, the government considered
     money markets, where banks lend to each other,
                                                            the nationalising of selected private banks in the
     and also allow the lenders to manage their liquidity
     needs better. Major features of the LMF is as given    country due to the following major reasons:
     below:                                                      (i) As the banks were owned and managed
               RBI started conducting 14-day term                    by the private sector the services of the
               repurchase auctions four times a fortnight,           banking were having a narrow reach—
               up to an aggregate amount equal to 0.75               the masses had no access to the banking
               per cent of the system’s deposit base or              service;
               net demand and time liabilities (NDTL).          (ii) The government needed to direct the
               Unlike earlier, RBI has announced a                   resources in such a way that greater public
               fixed schedule for these 14-day term repo             benefit could take place;