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;