You often hear your banker or lending institution use these terms, but what do they mean? We simplify 5 common jargon terms in relation to loan interest rates.
Taking a home loan is as simple or as tedious as your lending institution makes the task to be. Apart from understanding how the loan interest computation works (make sure to use a home loan interest calculator) you come across incomprehensible terminology like base rate or reverse repo.
These terms might not be immediately apparent in meaning and scope, but they have a direct impact on the interest rate charged to you on your loan. If you want to delve deeper into the subject, you should start by using a home loan interest calculator to find out the interest slabs being charged on your loan, and how much your monthly EMI will be. While your understanding of financial jargon is not crucial to getting the home loan, it helps to understand these terms for a deeper insight into how you have been charged interest on the loan. You can even ask for a correction in some cases, if you are armed with the knowledge of –
Abase rate is a rate stipulated by the RBI, and the rate is applicable to all banks and financial institutions in the country. No lender may grant loans at a rate lower than the base rate. The RBI specifies this rate to bring in more transparency in the credit market. But from April 1, 2016, the RBI introduced the Marginal Cost fund-based Lending Rate (MCLR), which sets five rates for different time periods (overnight, monthly, quarterly, six monthly and annually). The base rate is now computed basis the MCLR calculation.
2 Repo rate
This is the rate at which lenders borrow money from the RBI, to meet a deficit in funds. The repo rate is used to control inflation, but mostly, it functions as a regulator for interest rates. When the RBI wants to infuse more money in the market, it lowers the repo rate. A lowered repo rate results in lending institutions lowering the interest rate on their loans.
3 Reverse repo
Converse to repo rates, a reverse repo rate is the rate at which the RBI borrows money from banks and financial institutions. This is used as an instrument to control the money supply in the market – increased repo rate leads to decreased money supply. When banks lend money to the RBI, they have less money to lend. Thus, interest rates may rise as a result of higher reverse repo rates.
4 Statutory Liquidity Ratio (SLR)
Every lender must maintain a certain percentage of money as assets in the form of gold or cash, to pay net demand instruments such as deposits, and the time liable instruments such as time-locked investments. This ratio between net demand and time liable instruments is the Statutory Liquidity Ratio (SLR), and it must be fixed number so that banks and lenders can infuse more money into the markets. The SLR also has a direct impact on lending rates.
5 Cash Reserve Ratio (CRR)
This ratio signifies the fraction of the overall deposits that customers have made with the bank or financial institution, and which the lenders must hold as reserves with the RBI. Holding these monies as reserves ensures that the lender does not face a shortfall when their customers need money. What it means is that if the deposit increases by Rs 100 and the CRR is 9%, then the lender holds Rs 9 with the RBI and Rs 91 for lending.