Bank and Banking related terms

A bank is a financial institution which creates money by lending and borrowing. Before development of banks, there is Barter system in our country. After that lending is done by various people but they charge more rates and exploit people. . Different commercial bank provide loan and deposit money and perform all functions. There is a question, who provides funds to these commercial bank? Central bank of every country lending money to these commercial bank on a specific interest rate. It may be possible that different commercial bank charge high rate and  exploit customer, so central bank ( reserve bank of India ) fix a rate on which commercial  bank provide loan to general public, various industry and maintain economic stability.

Repo rate: Repo rate is a rate, when different commercial bank deposits their money to central bank and central bank provide interest to commercial bank. This rate is also fix by central bank of every country. Current repo rate is 7.23%.

Reverse Repo rate: when RBI borrows money from different commercial banks and paid interest with a specific rate which is known as Reverse Repo rate. Main purpose of doing so , to less funding available for public and control inflation. Current Reverse Repo Rate 6.25%

Cash reserve Ratio: Every commercial bank has to keep a portion of deposits (as cash) which banks have to keep/maintain with the RBI .Main purpose of doing so, it ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system. Current cash reserve ratio is 4 percent on jan 2013.

Statutory liquidity ratio: Every financial institution has to maintain a certain quantity of liquid assets with themselves at any point of time of their total time and demand liabilities. These assets can be cash, precious metals, approved securities like bonds etc. Current  statutory liquidity ratio is 23 percentage.

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