A

COMPREHENSIVE PROJECT REPORT

ON
[IMPACT OF REPO RATE ON BANK LENDING BY RBI]
SUBMITTED TO

[SHREE.H.N. SHUKLA COLLEGE MANAGEMENT STAUDIES]

*
In partial fulfillment of the
Requirement of the award for the degree of
Master of business administration

Gujarat Technological University

UNDER THE GUIDANCE OF
Asst. Prof. Jay Goswami
SUBMITTED BY
(VISHVAKARMA JITENDRA K.)
[Enrollment No.:167590592092]
(ZAPDIYA SAGAR S.)
[Enrollment No.:167590592096]
MBA SEMESTER III/IV
(SHREE H.N. SHUKLA COLLEGE MANAGEMENT STUDIES)

MBA PROGRAMME
Affiliated to Gujarat Technological University
Ahmadabad
Year 2016-2018
 Preface

This project provides an opportunity to demonstrate application of our knowledge, skill and
competencies required during the financial session. This project helps us to devote our skill to
analyze the problem to suggest alternative solutions and to evaluate them. We have worked on
the topic is “IMPACT OF REPO RATE ON BANK LENDING BY RBI” We have put our level
best to prepare our project an error free project every effort has been made to offer the most
authenticate position with accuracy.

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 Acknowledgement

We would like to express our profound gratitude to all those who have been instrumental in the
preparation of this report which has been prepared in partial fulfillment of Comprehensive
Project in the Semester III/ IV of an MBA program.
This project could only be completed with the assistance of Asst. Prof. Jay Goswami having
being a valued guide.
Finally, we would like to thank our Parents, Family, Friends and Good almighty for their
unending inspiration and encouragement.

Place: Rajkot (Gujarat)

Date:

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 Declaration

We, VISHVAKARMA JITENDRA & ZAPDIYA SAGAR hereby declare that the report for
“Comprehensive Project” entitled “IMPACT OF REPO RATE ON BANK LENDING BY
RBI” is the result of our own work and our ineptness to other work publications, references, if
any, have been duly acknowledged.

Place: Rajkot Signature

Date: 05/05/2018 Vishwakarma Jitendra

Signature
Zapdiya Sagar

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 Executive summery

Changes in Repo rate affect the cost of borrowing of Bank, which shows that RBI plays a very
important role in supply of money in the market. This paper examines the recently impact of
raise repo rate on banking lending from the period of September –till now, it explains what is the
scenario of lending behavior towards personal loan and corporate loan. I have done recent
theoretical and empirical work that relates to the “lending” channel of monetary policy
transmission and monetary policy and long-term real rates. Investigate the efficiency level of
repo rate among the all monetary tools. This study to find out at what level the impact repo on
deposit and loan, what should be investment strategy of general public towards changes in it.
Inflation beyond there should level make growth costly and calls for policy change. As a result
of increasing rate for control inflation, the cost of borrowing has been higher.
In the dynamic world of finance the demand for credit is one of the constants. In India, banks are
the most important channel to meet this demand. Banks connect the surplus and deficit economic
agents through their primary activity of financial intermediation, and generate profits largely
from the difference between the interest paid to the depositor and charged to the borrowers. At
the time of lending funds, banks are expected to carry out necessary credit appraisal and due
diligence and thereafter, charge interest accordingly. The interest rates charged to borrowers can
be determined by banks based on fixed rules or discretion. Under rules based lending, banks may
use models to arrive at the interest rate that may be charged to the customers. A number of
research papers have endeavored to model the factors that determine the lending rates by banks.
While rule based lending leads to interest rates that are based on pre-defined factors, lending
based on discretion allows flexibility to banks in terms of considering customer specific
attributes as well. Notwithstanding the method followed, it is in the interest of all stakeholders
that pricing is kept efficient and fair. 0.3 Efficient and fair pricing of credit by banks, within the
ambit of policy of the Central Bank, is assumed to be serving the following three objectives:

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a. Flexibility to the lenders, enabling them to adjust the rates quickly to the dynamic economic
scenario so that they remain competitive and profitable.
b. Effectiveness to the monetary policy so that the policy signals are quickly and adequately
transmitted to the financial system to achieve the objectives of the monetary policy.
c. Protection to customers from the unfair practices of lenders, by being transparent and non-
discriminatory.

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 Table of content
SR.NO PARTICULAR PAGE
NO
1 HISTORY OF BANKING INDUSTRY 9
 STATE WISE BIFURGATION 11
 Scheduled bank
 Non-Scheduled bank
INTRODUCTION ABOUT THE COMMERCIAL CO-OPRRATIVE
BANK
 Role of commercial and co-operative bank 13

2 BANKING SECTOR IN INDIA

 About RBI 15
17
 Main function and role of RBI
19
 Major players of banking industry

 Background of study 20

 Impact of repo rate 21

3 LENDING VIEWS
 Concept of lending in India 24

 Sources of fund 25

 Relationship between repo rate and Interest rate history 30

 India prime lending from RBI (1978-2018) 32

 Factors affecting interest rate 35

4 REPO POLICY
 Monetary policy 36

 Monetary instrument 38

 Repo rate vs. interest rate 41

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  Relationship between repo rate and reverse repo rate 43

 Interest rate Risk 46

 Types of interest rate and SWAP 49

5 LITERATURE REVIEWS 53
6 RESEARCH METHODOLOGY 55
 Problems of study
 Objective of study
 Importance of study
 Co-efficient of correlation 57

 Finding 59

7 Conclusion 60

8 Suggestion 61

9 Bibliography 62

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 History of banking industry

The banking industry is one the oldest in the world. Banking originated about 4000 years ago in
Places such as Babylon, Mesopotamia and Egypt where grains and other Valuable commodities
were stored and receipts given as proof of sale of purchase.

As early as 2000 B.C., the Babylonians has developed a banking system. There is evidence to
show the temples of Babylon were used as banks. After a period of time, there was a spread of
irreligion, which soon destroyed the public sense of security in depositing money and valuable in
Temples. The priests were longer acting as financial 45 agents. The Romans did minute
regulations, as to conduct private banking and to create confidence in it. Loan banks were also
common in Rome. From these the poor citizens received loans without paying interest, against
security of land for 3 or 4 years. During the early periods, although private individuals mostly
did the banking business, many countries established public banks either for the purpose of
facilitating commerce or to serve the government.

However, upon the revival of civilization, growing necessity forced the issued in the middle of
the 12th century and banks were established at Venice and Genoa. The Bank of Venice
established in 1157 is supposed to be the most ancient bank. Originally, it was not a bank in the

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modern sense, during simply an office for the transfer of the public debt. Again the origin of
modern banking may be traced to the money dealers in Florence, who received money on
deposit, and were lenders of money in the 14th century and also in 1349, the business of banking
was carried on by drapers of Barcelona.

In India, as early as the Vedic Period, banking, in most crude from existed. The books of Manu
contain references regarding9 deposits, pledges, policy of loans, and rate of interest. True, the
banking in those days largely mint money lending and they did not know the complicated
mechanism of modern banking. This is true not only in the case of India but also of other
countries. Although, the business of banking is as old as authentic history, banking institutions
have since then changed in character and content very much. They have developed from a few
simple operation involving the satisfaction of a few individual wants to the complicated
mechanism of modern banking, involving the satisfaction of capital slowly seeking employment
and thus providing the very life blood of commerce.

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 Status wise bifurcation of banks

 Scheduled banks.
 Non-scheduled banks.

Scheduled banks
In first schedule, Government of India notifies the Primary Banks, which are licensed and whose
Demand and time liability are not less than 50 corers in 1987. Government of India notifies the
Primary banks, which are licensed and whose demand and time Liability are not less than 100
corers can only qualify to be included in the second schedule since 1993.

Non-scheduled bank
The banks, which are not applicable as per the criteria of Scheduled Banks, are called as a Non-
scheduled Banks. These are very small banks.
Types of banks
Regional Rural Bank
Nationalize Bank
State Bank Group
Co-operative Bank
Private Bank
Foreign Bank

Reserve bank of India

The Hilton-young commission, appointed in 1926 has recommended the necessity of centrally
Empowered institution to have effective control over currency and financial transaction in the
Country. Accordingly, the Government had then passed Reserve Bank of India Act, 1934 and
established the Reserve Bank of India with effect from 1st April 1935. The principal aim behind
this was to organize proper control over the currency management in the interest of country
Benefits and to maintain financial stability. With this, the RBI mainly looks after the following

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 Important functions:
Nationalize banks
The Banking Company Act establishes it in July 1969 by nationalization of 14 major banks of
India. The sent percent ownership of the bank is of government of India.

State bank group

The State Bank of India was established under the State Bank of India Act, 1955, the subsidiary
banks under the State Bank of India (subsidiary Banks) Act, 1959. The Reserve Bank of India
owns the State Bank of India, to a large extent, and rest of the part is some private ownership in
the share capital of State Bank of India. The State Bank of India owns the subsidiary Banks.

Old private banks

These banks are registered under Company Act, 1956. Basic difference between co-operative
banks and private banks is its aim. Co-operative banks work for its member and private banks
work for earn profit.

New private banks

These banks lead the market of Indian banking business in very short period, because of its
variety of services and approach to handle customer, also because of long working hours and
speed of services. This is also registered under the Company Act, 1956.
Foreign banks

Foreign Bank means multi-countries bank. In case of India foreign Banks are such Banks, which
Open its branch office in India and their head office is outside of India.

Regional rural banks (RRB)

Regional Rural Banks are added in Indian Banking since October 1975. The Government of
India in terms of the provision of the Regional Rural Bank Act 1976 has established these banks.

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 Co-operative banks

State co-operative banks

State Co-operative Bank means the principal Co-operative society in the state. The primary
objective of which is the financing other co-operative societies in the state.

Central / district co-operative banks

Central / District co-operative Bank means the principal co-operative society in a district, the
primary objective of which is the financing of other co-operative in that particular district.

Primary / Urban co-operative banks

The primary objective of principal business of which the transaction is of banking business and
paid up share capital and reserve of which are not less than rupees 100,000 and bye-laws of
which do not permit admission of any other co-operative society as a member.

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Structure of Indian banking

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 Introduction about reserve bank of India

The Reserve Bank of India is the central bank of the country. Central banks are a relatively
recent innovation and most central banks, as we know them today, were established around the
early twentieth century.

The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young
Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides the statutory basis of
the functioning of the Bank, which commenced operations on April 1, 1935.

The bank was constituted to:-

 Regulate and issued of banknote

 Maintain and reserves with a view to securing monetary stability and
 To operate the credit and currency system of the country to its advantages.

The Bank began its operations by taking over from the Government the functions so far being
performed by the Controller of Currency and from the Imperial Bank of India, the management
of Government accounts and public debt. The existing currency offices at Calcutta, Bombay,
Madras, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue

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Department. Offices of the Banking Department were established in Calcutta, Bombay, Madras,
Delhi and Rangoon.

Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act
as the Central Bank for Burma till Japanese Occupation of Burma and later up to April, 1947.
After the partition of India, the Reserve Bank served as the central bank of Pakistan up to June
1948 when the State Bank of Pakistan commenced operations. The Bank, which was originally
set up as a shareholder's bank, was nationalized in 1949.

An interesting feature of the Reserve Bank of India was that at its very inception, the Bank was
seen as playing a special role in the context of development, especially Agriculture. When India
commenced its plan endeavors, the development role of the Bank came into focus, especially in
the sixties when the Reserve Bank, in many ways, pioneered the concept and practice of using
finance to catalyze development. The Bank was also instrumental in institutional development
and helped set up institutions like the Deposit Insurance and Credit Guarantee Corporation of
India, the Unit Trust of India, the Industrial Development Bank of India, the National Bank of
Agriculture and Rural Development, the Discount and Finance House of India etc. to build the
financial infrastructure of the country.

With liberalization, the Bank's focus has shifted back to core central banking functions like
Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System and
onto developing the financial markets.

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 Main function and role of RBI

Monetary authority:

 Formulates, implements and monitors the monetary policy for A) maintaining price
stability, keeping inflation in check; B) ensuring adequate flow of credit to productive
sectors.

Regulator and supervisor of the financial system

 Lays out parameters of banking operations within which the country’s banking and
financial system functions for- A) maintaining public confidence in the system, B)
protecting depositors’ interest; C) providing cost-effective banking services to the general
public.

Regulator and supervisor of the payment systems:

 Authorizes setting up of payment systems; B) Lays down standards for working of the
payment system; C) lays down policies for encouraging the movement from paper-based
payment systems to electronic modes of payments. D) Setting up of the regulatory
framework of newer payment methods. E) Enhancement of customer convenience in
payment systems. F) Improving security and efficiency in modes of payment.

Manager of foreign exchange:

 RBI manages forex under the FEMA- Foreign Exchange Management Act, 1999. In
order to A) facilitate external trade and payment B) promote the development of foreign
exchange market in India.

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Issuer of currency:

 RBI issues and exchanges currency as well as destroys currency & coins not fit for
circulation to ensure that the public has an adequate quantity of supplies of currency
notes and in good quality.

Developmental role:

 RBI performs a wide range of promotional functions to support national objectives.

Under this it setup institutions like NABARD, IDBI, SIDBI, NHB, etc.

Banker to the government:

 Performs merchant banking function for the central and the state governments; also acts
as their banker.

Banker to banks:

 An important role and function of RBI is to maintain the banking accounts of all
scheduled banks and acts as the banker of last resort.

 An agent of Government of India in the IMF.

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Major playesr in banking industries

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 Background of study

Understanding the effects of monetary policy on the economy is central to the study of
macroeconomics and practice of policy makers. The monetary policy framework of India’s
central bank has been evolving since the mid-1990s, and a path for a strengthened framework
was laid out recently in the Patel Committee Report to the Reserve Bank of India (RBI).The RBI
has expressed concern over a lack of policy rate pass-through to lending rates and deposit rates,
and certain changes to the monetary policy operating framework have been implemented with
the aim of improving transmission. Recent RBI monetary policy statements mention pass-
through of past policy rate cuts to lending rates as a prerequisite for further monetary easing
(March 4, 2015), and discuss lending rate sensitivity to the policy rate (April 7, 2015).

The monetary policy adopted by the Reserve Bank of India during 1990-91 to the 1st quarter of
1991-92 had the basic thrust on controlled expansion of money and credit. Deteriorated balance
of payment position and liquidity built-up caused by higher order of monetary growth in 1988-89
and 1989-90 contributed to acceleration of inflationary pressure in 1990-91. Further, a notable
feature of Indian financial system during 1980`s was one of the administered interest rates. Both
the deposit as well as lending rates of banks were determined by the Reserve bank.
The most significant step taken with regard to the administered interest rates in 1990-91 „by the
Reserve Bank of India‟ was the rationalization of the lending rate of scheduled commercial
banks. The revised structure of interest rates was introduced with effect from September 22,
1990. Deposit rates were rationalized by substantially narrowing the spread of rates of different
maturities. On the lending side, floor rate (minimum rate) was maintained, which enabled banks
to vary interest rates according to market conditions.

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 IMPACT OF REPO RATE

We all Indian read and watch in newspaper changes Repo rate and other monetary instrument.
Debt markets affected by the changes in “repo rate and reverse repo rate “Bank decided their
lending rates on the basis of change in Repo rate by 25 bps to 8% in January 2014 credit policy.
This is the third time that Governor of RBI. Rajan has raised rates after taking over as governor
in September 2013 last year an increase of 75% basis point from 7.25% to 8% in four months.
The months. The move is unlikely to have an impact on rates charged by banks.
In a surprise move. The Reverse bank of India release its third quarter monetary policy increased
the short term lending rate of repo rate to 8 per cent from the existing 7.75 per cent. This move
see ad a surprise to most financial experts as it was announced despite the lower inflation rate
released in December. While RBI justified the revision saying it is an essential option to bring
down retail inflation in point vies of business leaders, this move is disappointing
Let us take a look at how RBI’s repo rate policy impact loans, fixed deposits and other areas of
life for the common man.
Before getting into the reasons why the increase in repo rate may be bad news for the common
man with increased loan EMIs, it is essential to understand what repo rates are and how they
impact the banking system. In a layman’s term, Repo rate is the rate which the Reverse Bank of
India lends money to commercial banks. The increase in repo rates for 7.7% to 8% would mean
that the RBI would change a higher rate of interest for all money given out of various
commercial banks. The bank in turn would be forced to charge its customers a higher rate of
interest when it comes to home and auto loans to offset the higher interest rate.

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 IMPACT ON DEPOSIT AND LENDING RATES

Most financial experts are of the opinion that the immediate impact of the increase in repo rates
may not necessarily get translated into higher deposits and lending rates offered by the banks.
The banks already fighting a weak loan growth rate due to a sluggish real estate sector are
unlikely to pass on the increased rates to the customer immediately. Depending on the liquidity
condition of the banks, the changes interest and deposit rates may be passed on once banks
analyze their cost of funds over next few days.

Increase EMI’s
Once the banks analyze their cost of funds and their overall liquidity condition, the higher
interest rates would have to be passed on to the end user or the retail customer. This would
effectively mean higher EMIs on home loans, auto loans as well as personal loans.
The Home loan segment is likely to face the brunt of his increase in repo rate. Financial experts
believe that since the car loan market is dominated by various schemes, financers are likely to
absorb the rate hike by increasing discount offers. Majority of car loans are on fixed rate basis
compared to home loans with majority offered on floating rate basis. Any rates impact due to the
repo rate increase would not necessarily impact the auto loan market as much as it would impact
the home loan segment. Real estate companies and developers already facing the brunt of
sluggish sales are disappointed with this rate hike as it is likely to dampen interest in the real
estate segment.

Impact on loans
The question as to whether banks would actually increase the lending rates amid the hike in repo
rates remains an open one. Once done with analyzing their costs of funds and banks liquidity
conditions, the banks would have no option but to increase their interest rates.
For example, assuming the interest rate on a 20-year housing loan of Rs 75 Lakh is increase from
11 to 11.25 %,(EMI 77,414on 11 % and 78,694 on 11.25 %) it will translate into an increase of
approximately Rs 1280 per month in EMI

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Impact on fixed deposits:

The Reserve Bank of India has recently cut repo rates post demonetization. The rate cut does
influence interest rates on fixed deposits. Lower repo rates (rates at which banks borrow money
from the Reserve Bank of India) translate into a direct impact on cost of funds for banks. As a
result, whenever there is excess liquidity, banks cut the deposit rates. This has a direct impact on
those investors and depositors who depend on assured investments like fixed deposits. After
demonetization, most big lenders have cut their FD rates by up to 0.25% post a huge increase in
deposits.
The short-term impact of such a hike is does not augur well for investors parking their money in
fixed deposits. Being an election year, the banks may reduce retail deposit rates only slightly for
below one-year fixed deposits simply to keep their margins intact. The long-term policy of the
RBI is now aimed at fighting retail inflation. Once the inflation rates are substantially lowered,
the prospect of investing in fixed deposit over the long term offers lucrative gains. The
immediate impact on small fixed deposits may be a damper but banks are unlikely to lower
interest rates across the board as of now giving relief to a vast section of fixed deposit account
holders.

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 LENDING VIEWS IN INDIA:

Banks make generally commercial loans designed to meet the specific needs of a borrower. They
also make standardized loans as in the case of mortgage and credit card loans which can be
packaged into securitized loans and sold in pools in the secondary markets. Banks which are
uniquely qualified to make, monitor and collect commercial loans as well as standardized loans
however face competition from insurance companies. Unit trust and non-bank finance
companies.
Borrower’s especially large corporate also have choice to raise funds directly in the primary
market by issue of share and debentures and public fixed deposits and in the money market
through issues of commercial paper. The competition from other types of lenders and direct
financing by prospective borrowers has reduced the profitability of banks, to offset lower profit
banks abroad have shifted some of their loans to higher yielding and higher risk real estate loans
and loans to emerging countries. The crash in real estate values and large-scale defaults on LDCs
debt in 1980s and 1990s has highlighted the tradeoff between risk and return.

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 SOURCES OF BANKING FUND

The money that a bank raises to lend is often called the capital. So how does banks raise capital
is something that has to be understood in his background. Banks have to raise money from
sources in order to have it with them to be lent to customers. From whom they charge a rate of
interest that is higher than at which they borrow. This accounts for their profit. Since capital is
one of the critical
Components of a banking business, it is important to understand where all and how to banks
raise capital.
As mentioned before, banks basically make money by lending money at rates higher than the
cost of the money they lend. More specifically, banks collect interest on loans and interest
payment from the debt securities they own, and pay interest on deposits CDs, and short-term
borrowings. The difference is known as the “spread” or the net interest income and when that net
interest income is divided by the bank’s earning assets; it is known as the net interest margin.

DEPOSITS
The largest sources by far of funds for banks are deposits; money that accounts holders entrusts
to the banks for safekeeping and use in future transactions, as well as modest amounts of interest.
Generally referred to as “core deposits” these are typically the checking and saving accounts that
so many people currently have.
In most cases, these deposits have very short terms. While people will typically maintain
accounts for years at a time with a particular bank, the customer reserves the right to withdraw
the full amount at any time customer have the options to withdraw money upon demand and the
balances are fully insured, up to $250,000 therefore, banks do not have to pay much for this
money. Many banks pay no interest at all on checking account balances, or at least pay very
little, and pay interest rates for saving account that is well below U.S. Treasury bond rates.

Wholesale deposits
If a bank cannot attract a sufficient level of core deposits, that bank can turn to wholesales
sources of funds. In many respects these wholesale funds are much like interbank CDs. There is
nothing necessarily wrong with wholesales funds. But investor should consider what it says
about a bank when it relies on these funding sources. While some banks de-emphasize the

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branch- based deposit gathering model, in favor of wholesales funding heavy reliance on this
source of capital can be a warning that a bank is not as competitive as its peers.
Investor should also note that the higher cost of wholesale funding means that a bank either has
to settle for a narrower interest spread and lower profits, or pursue higher yield from its lending
and investing, which usually means taking on greater risk.

Share equity
While deposits are the primary sources of loan able funds for almost every bank. Shareholder
equity is an important part of a bank‘s capital. Several important regulatory ratios are based upon
the amount of shareholder capital a bank has and disappear.
Common equity is straight forward. This is capital that the bank has raised by selling shares to
outside investors. While banks, especially larger banks, do often pay dividend on their common
shares, there is no requirement for them to do so.
Banks often issue preferred shares to raise capital. As this capital is expensive and generally
issued only in times of trouble, or to facilitate an acquisition, banks will often make these shares
callable. This gives the bank the right to buy back the shares at a time when the capital position
is stronger and the bank no longer needs.
Equity capital is expensive, therefore banks generally only issue share when they need to raise
funds for an acquisition or when they need to repair their capital position, typically after a period
of elevated bad loans. Apart from the initial capital raised to fund a new bank, banks do not
typically issue equity in order to fund loans.

Debt
Banks will also raise capital through debt issuance. Banks most often use debt to smooth out the
ups and downs in their funding needs, and will call upon sources like repurchasing agreements or
Repo market, to access debt funding on a short-term basis.
There is frankly nothing particularly unusual about bank -issued debt, and like regular
corporation’s banks may be callable and/or convertible. Although debt is relatively common on
bank balance sheets. It is not a critical source of capital for most banks. Although debt/equity
ratios are typically over 100% I the banking sector. This is largely a function of the relatively

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low level of equity at most banks. Seen differently, debt is usually a much smaller percentage of
total deposits or loans most banks and is accordingly, not a vital source of loan able funds.

USE OF FUNDS

Loans
For most banks, loans are the primary use of their funds and the principal way in which they earn
income. Loans are typically made for fixed terms, at fixed rates and are typically secured with
real property often the property that the loan is going to be used to purchase. While banks will
make loans with variable or adjustable interest rates and borrowers can often repay loans early,
with little or no penalty, banks generally shy away from these kinds of loans, as it can be difficult
part and parcel of a bank’s lending practices is its evaluation. When considering a loan. Banks
will often evaluate the income, assets and debt of the prospective borrower, as well as the credit
history of the borrower. The purchase of the loan is also a factor in the loan underwriting
decision loans taken out to purchase real property such as homes, car, inventory etc. are
generally considered less risky as there is an underlying asset of some value that bank can
reclaim in the event of nonpayment.
As such, banks play an under-appreciated role in the economy. To some extent, bank loan
officers decide which project, and /or businesses, are worth purchasing and are deserving of
capital.

Consumer Lending

Consumer lending grew at a higher rate in 2013 than in 2012 and in 2011. This was despite
negative economics sentiment in terms of low growth, high inflation and high interest rates. The

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high growth was partly due to smart positioning of products by banks such as pushing credit
cards, housing loans and auto loans to self-employed individuals and partly it was because the
impact of recession was less on individuals compared to the corporate segment. Not only growth
was less on 2013, but bad assets were also on the lower side than in previous years.

SENTIMENT REMAINED NEGATIVE IN INDIA ECONOMY IN 2013

The overall sentiment remained negative in the Indian economy through 2013. The growth in
gross domestic’s product was a fraction of its peak level in 2007. Inflation continued to remain
high in certain pockets, as the price of vegetables soared. The Indian rupee depreciated
significantly throughout the year. Reserve Bank of India the apex body did not find conditions
conducive to cutting key rates. In the absence of rate cuts, banks were not in a position to cut
lending rates, which was considered important to boost credit growth. The only silver lining was
that the retail side of lending performed better than the corporate side giving breathing space to
all financial institutions
SCHEDULED COMMERCIAL BANKS CONTINUE TO LEAD CONSUMER LENDING
IN 2013
Banks such as State Bank of India, Punjab National Bank, ICICI Banks Ltd. HDFC bank Ltd.
Bank of India, Bank of Baroda and Axis Bank Ltd continued to dominate consumer lending in
2013. These entities fall under schedule commercial banks (SCBs). The reason that these entities
dominated was their decade’s long experience in the Indian market, huge capital bases and was
their networks. Apart from banks, several Non- Banking financial companies (NBFCs) were also
a part of consumer lending, such entities were smaller in scale than banks because they could not
raise money through saving and current deposits, NBFCs had to raise money from money
markets and therefore they operate on a much smaller scale than banks. Apart from NBFCs,
several microfinance institutions (MFIs) also operated in this business SCBs, NBFCs, and MFIs
continued to attempt to reduce the share of informal money lenders in 2013.

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CARD LENDING WITNESS FASTEST GROWTH IN 2013

Credit card outstanding balance witnessed the fastest growth in 2013. This was because retail
banking consumer continued to report significant growth in disposable incomes. Based on this,
banks felt assured of their creditworthiness and focused more on credit cards in 2012 and 2013.
Banks realized that the slowdown affected the corporate segment more than retail consumers.
This was because a population continued to post growth in their income and bankers realized
their continued creditworthiness. Therefore, banks targeted such individuals to grow their credit
card portfolios.

CONSUMER LENDING EXPECTED TO POST STRONG GROWTH OVER THE

FORECAST PERIOD
Consumer lending is expected to see continued strong growth in outstanding balance in constant
value terms over the forecast period. This will be due to rising disposable incomes, the growth of
banks and other financial institutions and increasing financial inclusion. More consumers will
come under the ambit of organized means of financing, rather than informal money lenders, who
generally change exorbitant rates of interest.

TYPES OF LOANS
AUTO LOAN

Most of the banks provide car loans. Car loan also termed as Auto Loan. One can get car loan up
to 85% of ex-showroom price of the car with some amount of processing fee.

EDUCATION LOAN

Hiking the key policy rate today will hit property sales, particularly in the residential segment,
real estate developers, raised the key policy rate by 0.25 percent to 8 percent in a bid to curb
inflation, a move that may translate in to higher EMIs and push up the cost of borrowing for the
corporate, there is already a slowdown in the property market and the overall economy. So, there
would not be much adverse impact on sales make corporate and retail loan more expensive. It
may increase EMI burden on common man.

Page | 29
PERSONAL LOAN

Credit costs are lower in segments such as home loans, which are secured loans rates might be
seen in segments such as personal loans, which were riskier than home loans. The fact than most
banks were consciously going slow on credit growth owing asset quality concerns, was another
reason why arise in lending rates was unlikely at this point.

RELATIONSHIP BETWEEN REPO RATE AND INTEREST RATE

(HISTORY)
BANK INTEREST RATE ON CHARGE ON LOAN
Date Repo rate Interest rate
1/4/2018 6.00 8.70
1/1/2018 6.00 8.65
1/10/2017 6.25 8.95
1/7/2017 6.25 9.00
1/4/2017 6.25 9.10
1/1/2017 6.50 9.25
5/10/2016 6.50 9.20
5/10/2015 6.75 9.30
8/6/2015 7.50 9.70
10/4/2015 7.75 9.85
1/1/2014 8.00 10.00

Repo rate and bank interest rate

relationship
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018
Repo rate Interest rate

Page | 30
GRAPHICAL INTERPRETATION:-

 In this statement mentioned relationship between the repo rate and bank interest rate co-
relationship when the bank is borrowing money from the RBI the reason behind to
shortage money supply in the bank to running bank operation the RBI can be given
money at the specified rate that is called repo rate. When the repo rate is high the bank
pay high liquidity for the RBI.
 Due to high repo rate bank will be offered to general public at the high interest rate.
 In year 2015 repo rate is 6.75% while the bank interest rate is 14.60% charge on loan and
offered to the general public.
 Now after that 2016 to 2018 gradually decreasing repo rate and as well as bank would be
decreased lending rates. On other hand EMI would be cheaper and also bank offering at
the lowest interest change.

Page | 31
 INDIA PRIME LENDING RATE FROM RBI

Bank Lending Rate in India remained unchanged at 9.45 percent in April from 9.45
percent in March of 2018. Bank Lending Rate in India averaged 13.66 percent from 1978
until 2018, reaching an all-time high of 20 percent in October of 1991 and a record low of
8 percent in July of 2010.

Page | 32
IMPACT OF REPO RATE ON DEMAND DEPOSIT AND TIME DEPOSIT
(AMOUNT IN CRORE RS.)
Date Repo Rates Demand deposit Time deposit
18/04/2016 6.25% 7265.94 71433.72
04/04/2016 6.25% 7677.41 71633.63
21/03/2016 6.25% 7208.00 70185.85
07/03/2016 6.25% 7031.62 69891.5
21/02/2016 6.25% 6878.38 68887.71
07/02/2016 6.25% 6792.05 68921.38
24/01/2016 6.25% 6892.04 68353.06
10/01/2016 6.25% 6662.5 68565.79

8000000.00% Time deposit,

68565.79
7000000.00%
6000000.00%
5000000.00%
4000000.00%
Demand deposit,
3000000.00%
6662.5
2000000.00%
1000000.00% Repo Rates,
6.25%
0.00%

Page | 33
Demand Liabilities:

The liabilities which bank have to pay on demand. Current deposits, demand liabilities portion of
savings bank deposits, margins held against letters of credit/guarantees, balances in overdue
fixed deposits, cash certificates and cumulative/recurring deposits, outstanding Telegraphic
Transfers (TTs), Mail Transfer (MTs), Demand Drafts (DDs), unclaimed deposits, credit
balances in the Cash Credit account and deposits held as security for advances which are payable
on demand come under Demand Liabilities.

Time Liabilities:

The liabilities which bank have to pay after specific time period. Fixed deposits, cash
certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits,
staff security deposits, margin held against letters of credit if not payable on demand, deposits
held as securities for advances which are not payable on demand and Gold Deposits come under
Time Liabilities.

Page | 34
 FACTOR AFFECTING INTEREST RATE

 Interest rate depends on the activities and fluctuations in the money market. It depends on the
demand and supply of money in the economy at a given time the three main economic factors
that affect interest rates.

POLICIES OF THE CENTRAL BANK:

The apex bank or the central bank of the country (RBI in India) is responsible for monetary
stability in the country. To achieve this objective an important function of the central bank is
credit control. The apex bank controls the money supply in the economy through measures like
changing the Cash Reserve Ratio and the Repo Rate and Reserve repo rate.
The repo rate in common terms, is the interest rate at which commercial banks borrow from the
RBI. When there is inflation and the central bank wants to curb money supply and interest rate
and CRR. Thus making borrowing costly. Thus commercial banks in turn pass on this increased
rate to its customers rates id lowered by the Central bank. Thus making credit cheaper for
investment.

RECESSION:
During recession economic activities slow down. Expectation of fall in profit margins
discourages investment reducing the demand for credit this result in fall in interest rate.
Inflation- Inflationary pressures tend to raise the market interest rates. This is because when
prices are expected to rise considerably. The lender will be reluctant to lend during that period
fearing a loss of purchasing power of the loaned amount, on maturity. To compensate this loss a
higher interest rate in charged.

STATE OF THE ECONOMY:

When the economy is growing, the Demand is also growing with increased expectation of profit
in the future. Hence there is more deem and for credit for investment purpose. This raises the
interest rate. The opposite happens during recession.

Page | 35
 MONETARY POLICY IN INDIA

Monetary policy is the process by which monetary authority of a country, generally central bank
controls the supply of money in the economy by its control over interest rates in order to
maintain price stability and achieve high economic growth. In India, the central monetary
authority is the Reserve Bank of India (RBI). It is so designed as to maintain the price stability in
the economy. Other objectives of the monetary policy of India, as stated by RBI, are:-

PRICE STABILITY
 Price Stability implies promoting economic development with considerable emphasis on
price stability. The center of focus is to facilitate the environment which is favorable to
the architecture that enables the developmental projects to run swiftly while also
maintaining reasonable price stability.
CONTROLLED EXPANSION OF BANK CREDIT
 One of the important functions of RBI is the controlled expansion of bank credit and
money supply with special attention to seasonal requirement for credit without affecting
the output.
PROMOTION OF FIXED INVESTMENT
 The aim here is to increase the productivity of investment by restraining non-essential
fixed investment.
RESTRICTION OF INVENTORIES AND STOCKS
 Overfilling of stocks and products becoming outdated due to excess of stock often results
in sickness of the unit. To avoid this problem the central monetary authority carries out
this essential function of restricting the inventories. The main objective of this policy is to
avoid over-stocking and idle money in the organization.
TO PROMOTE EFFICIENCY
 It is another essential aspect where the central banks pay a lot of attention. It tries to
increase the efficiency in the financial system and tries to incorporate structural changes
such as deregulating interest rates, ease operational constraints in the credit delivery
system, to introduce new money market instruments etc.

Page | 36
MONETARY POLICY COMMITTEE

The Reserve Bank of India Act, 1934 (RBI Act) was amended by the Finance Act, 2016, to
provide for a statutory and institutionalized framework for a Monetary Policy Committee, for
maintaining price stability, while keeping in mind the objective of growth. The Monetary Policy
Committee is entrusted with the task of fixing the benchmark policy rate (repo rate) required to
contain inflation within the specified target level. As per the provisions of the RBI Act, out of the
six Members of Monetary Policy Committee, three Members will be from the RBI and the other
three Members of MPC will be appointed by the Central Government.

The Government of India, in consultation with RBI, notified the 'Inflation Target' in the Gazette
of India Extraordinary dated 5th August 2016 for the period beginning from the date of
publication of this notification and ending on the March 31, 2021 as 4%. At the same time lower
and upper tolerance levels were notified to be 2% and 6% respectively.

MONETARY OPERATIONS

Monetary operations involve monetary techniques which operate on monetary magnitudes such
as money supply, interest rates and availability of credit aimed to maintain Price Stability,
Stable exchange rate, Healthy Balance of Payment, Financial stability, Economic growth. RBI,
the apex institute of India which monitors and regulates the monetary policy of the country
stabilizes the price by controlling Inflation. RBI takes into account the following monetary
policies:

Page | 37
 INTRUMENTS OF MONETARY POLICY

 The RBI has numerous instruments of monetary policy at its disposal in order to regulate
the available. Cost and use of monetary and credit. Using these monetary policy instruments,
the RBI must walk a tightrope between trying to stimulate growth while keeping inflation
under control.

OPEN MARKET OPERATIONS

An open market operation is an instrument of monetary policy which involves buying or

selling of government securities from or to the public and banks. This mechanism influences
the reserve position of the banks, yield on government securities and cost of bank credit. The
RBI sells government securities to control the flow of credit and buys government securities
to increase credit flow. Open market operation makes bank rate policy effective and
maintains stability in government securities market.

CASH RESERVE RATIO

Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep
with RBI in the form of reserves or balances. Higher the CRR with the RBI lower will be
the liquidity in the system and vice versa. RBI is empowered to vary CRR between 15
percent and 3 percent. But as per the suggestion by the Narsimham committee Report the
CRR was reduced from 15% in the 1990 to 5 percent in 2002. As of 4 October 2016, the
CRR is 4.00 percent.[4]

Page | 38
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 have to be kept in
non-cash form such as G-secs precious metals, approved securities like bonds etc. The ratio
of the liquid assets to time and demand liabilities is termed as the ratio. There was a
reduction of SLR from 38.5% to 25% because of the suggestion by Narsimham Committee.
The current SLR is 19.50%.

BANK RATE POLICY

The bank rate, also known as the discount rate, is the rate of interest charged by the RBI for
providing funds or loans to the banking system. This banking system involves commercial
and co-operative banks, Industrial Development Bank of India, IFC, EXIM Bank, and other
approved financial institutes. Funds are provided either through lending directly or
discounting or buying money market instruments like commercial bills and treasury bills.
Increase in Bank Rate increases the cost of borrowing by commercial banks which results in
the reduction in credit volume to the banks and hence declines the supply of money. Increase

Page | 39
 in the bank rate is the symbol of tightening of RBI monetary policy. As on 2nd August 2017,
bank rate is 6.25 percent.

CREDIT CEILING

In this operation RBI issues prior information or direction that loans to the commercial banks
will be given up to a certain limit. In this case commercial bank will be tight in advancing
loans to the public. They will allocate loans to limited sectors. Few examples of ceiling are
agriculture sector advances, priority sector lending.

CREDIT AUTHORIZATION SCHEME

Credit Authorization Scheme was introduced in November, 1965 when P C Bhattacharya

was the chairman of RBI. Under this instrument of credit regulation RBI as per the guideline
authorizes the banks to advance loans to desired sectors.

MORAL SUASION

Moral Suasion is just as a request by the RBI to the commercial banks to take so and so
action and measures in so and so trend of the economy. RBI may request commercial banks
not to give loans for unproductive purpose which does not add to economic growth but
increases inflation.

Page | 40
 REPO RATE AND REVERSE REPO RATE

Repo rate is the rate at which RBI lends to its clients generally against government securities.
Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and
increase in Repo rate discourages the commercial banks to get money as the rate increases
and becomes expensive. Reverse Repo rate is the rate at which RBI borrows money from the
commercial banks. The increase in the Repo rate will increase the cost of borrowing and
lending of the banks which will discourage the public to borrow money and will encourage
them to deposit. As the rates are high the availability of credit and demand decreases
resulting to decrease in inflation. This increase in Repo Rate and Reverse Repo Rate is a
symbol of tightening of the policy.

Page | 41
 RBI REPO RATE VS REVERSE REPO RATE TREND CHART

Repo rate

Also known as the benchmark interest rate is the rate at which the RBI lends money to the banks
for a short term. When the repo rate increases, borrowing from RBI becomes more expensive. If
RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate
similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate.
Current repo rate is 6%

Reverse repo rate

Is the short term borrowing rate at which RBI borrows money from banks. The Reserve bank
uses this tool when it feels there is too much money floating in the banking system. An increase
in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a
result, banks prefer to lend their money to RBI which is always safe instead of lending it others
(people, companies etc.) which is always risky.

Page | 42
RELATIONSHIP BETWEEN REPO RATE AND REVERSE REPO RATE

Months Repo rate % Reverse repo rate %

January 2015 7.75 6.75
March 2015 7.50 6.50
June 2015 7.25 6.25
Sept. 2015 6.75 5.75
April 2016 6.50 6.00
June 2016 6.50 6.00
October 2016 6.25 5.75
January 2017 6.25 5.75
April 2017 6.25 5.75
August 2017 6.00 5.75

Repo vs reverse repo

REPO RATE % REVERSE REPO RATE %
7.75

7.25
7.5

6.75
6.75

6.25
6.25

6.25
6.25

6.5

6.5
6.5

5.75
5.75

5.75

5.75

5.75

6
6

Page | 43
 IMPACT ON REPO RATE AND BANK INTEREST RATE

REPO RATE:-

The rate at which RBI lends money to commercial banks is called Repo rate when repo rate
are increased , commercial banks have to return more money to RBI thus banks lend less
money from RBI as a result of which the money available loan interest rate to lend out in the
market. Banks increase their loan interest rate as they have less money to hand out in the
market which decreases amount of money in the market. Now, when people have less money
with them they spend less which decrease demand of product and as a result prices go down.
Repo Rate also decides the liquidity rate in the banking system. If RBI wants to increase the
liquidity rate, it will reduce the Repo Rate and encourage the banks to sell their securities.
However, if the central bank wants to control liquidity, it will increase the interest rate,
discouraging banks to borrow easily. An increased Repo Rate means that the central bank
will earn a higher interest rate from the commercial banks while an increased Reverse Repo
Rate means that the commercial banks earn high interest from the central bank.
Therefore high repo rates and low repo rates both are dangerous and RBI carefully monitors
and governs the repo rate to control the market.

BANK RATE:

The rate of interest charged by the central bank on the loans they have extended to
commercial banks and other financial institutions is called “Bank Rate”. In this case, there is
no repurchasing agreement signed, no securities sold or collateral involved. Banks borrow
funds from the central bank and lend the money to their customers at a higher interest rate,
thus, making profits. Bank Rate is usually higher than Repo Rate as it is an important tool to
control liquidity.

Page | 44
RELATIONSHIP BETWEEN REPO RATE AND BANK INTEREST RATE

Repo rate and Bank rate are two commonly used rate for borrowing and lending that are used by

the commercial and central banks. These rates are used in financial transactions between a

national or central bank and a domestic or commercial bank. Although, both rates are considered

the same, yet, there are some prominent differences between the two.

Bank-rate
another name used for bank rate by the financial institutions is a discount rate. The bank rate is

used by commercial banks when they borrow money from the central bank, and the

reason why they secure a loan is because of the anticipated shortage of funds in these banks.
Every individual must be aware of the fact that a bank rate has a direct impact on the lending

rates offered by commercial banks to their clients. The lending rate charged to commercial banks

is passed down to the individuals who borrow loan from these banks. If the bank rate decided

between a central and commercial bank is high, the rate offered by a commercial bank to its

clients will also be higher, and if the rate provided by a central bank is low, the lower rate will be

charged by commercial banks on the loan issued to the clients. Another important fact about

bank rates is that these rates are used by central banks of different countries to control and
manage the currency supply for the betterment of national economy and their banking sector.

When the unemployment rate in a country goes up, the central bank of that country reduces the

bank rate so that commercial banks offer decreased rates on loans to the individuals. Note that
such lending transactions do not involve any collateral.

Page | 45
 INTEREST RATE RISK

Net interest risk

 Net interest income which is the difference between interest income and interest expenses is
the principle determinant of the profitability of banks. Net interest income is determined by
interest rates on asset and paid for funds, volume of funds and mix of funds (portfolio
composition). Changes in interest rate affect the net interest income. Whenever rate of
interest conditions attaching to assets and liabilities diverge, then changes in market interest
rate will affect will bank earning. If a bank attempts to structure its assets and liabilities to
eliminate interest rate risk. The profitability of the bank would be impaired.

Mismatch of assets and liabilities

 A bank may borrow short and lend long. The mismatch of assets and liabilities gives rise to
interest rates can result in losses for the bank.

Variable interest rate

 Each bank through its choice form different types of assets and liabilities can alter the
structure of its balance sheet in order to increase or decrease interest rate exposure.

Yield curve
 Yield curve plays an important role in interest rate risk management. Banks accept interest
rate risk and maintain a slight liability sensitive position (rate sensitive assets less than rate
sentivitive liabilities

Page | 46
Maturity of funding gap
 The interest sensitivity position of a bank is usually measured by its gap, which is defines as
the different between the volume of interest sensitive assets and liabilities interest sensitive.

Duration
 Duration measures the interest rate risk of a financial instrument. It shows the relationship
between the changes in volume of a financial instrument and change in the general level of
interest rates.

Modified duration
 Modified duration provides a standard measure of price sensitivity to calculate the duration
of the portfolio of the portfolio as the weighted average of the duration of its individual
components.

Future, option and swap

 These derivative instruments allow a bank to alter interest rate exposure and each has
advantages and disadvantages compared with the other. When taken together they give a
bank enormous flexibility in managing interest rate risk.

Futures
 A futures contract is a standardized agreement to buy or sell an asset on a specified date in
future for a specified price. The Bayer agrees to take delivery at a future date at today’s
determined price, and the seller agrees to make delivery at a future date at today’s established
price.

Options on future contracts:

 Interest rate risk may also be hedge through options on futures contracts. An option provides
the buyer with the right, but not the obligation, to buy or sell an agreed amount of an
underlying instrument (such as a T-bill future contact) at an agreed price.

Page | 47
SWAP
 SWAP came into vogue in 1981. They are used widely by banks. At the end of 2004
outstanding (OTC) amount of interest rate swaps was $147 trillion. Swaps are private
arrangements to exchange cash flow in future according to a prearranged formula.
Interest rate swap

 In an interest swap two parties, called counter parties agree to exchange periodic interest
payments. The amount of interest payments exchanged is based on some predetermined
principal who is called the national principle amount.

Page | 48
 TYPES OF INTEREST RATE SWAPS

 Fixed-for-Floating
 Base Swaps (Floating-to-Floating Swaps)
 Zero Coupon for Floating Swap
 Forward Swaps (or Delayed Rate Setting Swaps)

SEPARATING INTEREST RATE RISK AND CREDIT RISK

 Banks do not want to make long-term loans at fixed rate of interest because rate of the
interest rate risk. Banks prefers the floating rate loan. With a swap the borrower rate
risk. The swap allows the separation of interest rate risk from credit risk. The bond
market carries rate swaps there is no exchange of notional or actual principle. If the
time of reciprocal interest payments coincide only the net different is paid.

PRICING INTEREST RATE SWAPS

 Pricing covers relevant interest rates and interest payment schedules and free for swap
dealer’s services. The interest rates are set to provide a spread which runs from 5 to
10 basis points. Interest rate swaps are standardized and do not generate fee income.
 Spreads on interest rate swaps are quite narrow reflecting low risks and the huge and
liquid financial markets. Narrow spreads provides an incentive to use interest rate
swaps.

Page | 49
 TYPES OF GOVERNMENT SECURITIES: TREASURY BILLS

14 days auction treasury bills introduced on June 6, 1997 auctions were discontinued with effect
from May 14, 2001.

91 day treasury bills

- Open market operations are conducted by RBI in these bills. These bills are self-
financing in character. The notified amount is varied between Rs. 500 to Rs 1500 cores
depending on liquidity conditions. The implicit yield at cut off price.

182 day treasury bills

- The 182 day bills were discounted effective form May 14, 2001. Total issues were Rs.
600 cores. They have been reintroduced form April 6, 2005.

364 day treasury bills

- The notified amount is Rs 1000 cores. The implicit yield at cutoff privet was 4.44% on
March 31, 2004.

Liquidity adjustment facility (LAF)

- Liquidity adjustment facility is operated by RBI through REPOs and reverses Repos in
order to set a corridor for money market interest rates. This is pursuant to the
recommendations of the committee on banking sector reforms.
- LAF is introduced in stages. In the first stage with effect from June 5, 2000 RBI
introduced variable REPO actions with same day settlement. The amount of REPO and
reverse REPO are changed on a daily basis to manage liquidity. The actions are held in
Government dated securities and treasury bills of all maturities except 14 days treasury
bills for parties holding SGL account and current account with RBI Mumbai. While
liquidity is an absorbed by RBI to minimize volatility in the money market, LAF can also

Page | 50
 augment liquidity through export credit refinance and liquidity support to primary
dealers.
- The fortnightly average utilization including export credit refinance has ranged between
RS. 4119 cores and Rs 7697 Crore during April to October 1999.
- Reserve liquidity with overnight fixed rate repo rate and reverse repo. Auctions of 7 day
and 14 day repo (reverse repo in international parlance) were discontinued from Nov 1,
2004. Absorption of liquidity by LAF window is termed reverse repo and injection of
liquidity. LAF has emerged as the tools for liquidity management and signaling device
for the interest rate in the overnight markets.

YIELD TO MATURITY OF CENTERAL GOVERNMENT DATED SECURITIES

 Of the outstanding central and state government secures of Rs.8,07,292.6 cores in 2003
SCBS on 58.56% and there ownership of central government securities was 58.99% (of
total Rs.1,33,089.6 cores) the distribution of their investment in government securities
of Rs.5,51,203 between center and state was 85.8% and 14.2% in 2003.
 The one year yield rate was 5.66% in March 2005, in medium term segment the 5 year
yield rate was 6.36% and at the longer end the 10 years yield rate was 6.65%. The
trends in yield –movement in the Government securities market during 2004-2005
showed that while the short rates responded reflecting the ripple impact of policy
changes.
 The average yield spread between 1 and 10 year maturity for central Government dated
securities was 114 basis points in 2003-04 and the average spread between 1 and 20
year maturity was 148 basis points. The components of spread are term risk premier
and inflation expectation, relatively higher risk premier arising from uncertainties
surrounding the fiscal policy and the Government borrowing programmed in future and
information bottlenecks.
Timely and adequate information plays a critical role in drawing long-term contracts,
reducing rate volatility basing investment decision on rational criteria and reacting to
market to market developments in a quick and efficient way.

Page | 51
 FOR INFRASTRUCTURE SECTOR INDIA NEEDS LONG TERM
DEBT MARKET.

 Bad debt held by Indian banks is growing as the economy slows down and infrastructure
projects stall, from Rs. 1.3 lakh Crore at the end March 2012, these have jumped to Rs
2.4 lakh Crore at the end of December 2013. India’s infrastructure companies grew at the
end pace through most of the 2000s embarking on spectacular projects fuelled by debt.
As they have slowed down critics say that they should not have taken on as much debt as
they did. This criticism is largely unfair.
 For companies to emerge from being relatively puny contracting entities too publicly –
listed Infrastructure developers funding was necessary and loans the only viable option.
Equity alone could not keep up with the rate at which projects were growing. The biggest
flaw in India’s infrastructure funding model is that it was largely financed by banks,
which hold mostly short-term cash but lend for longer term projects like building
highways and power plants.
 Today this has resulted in a large and growing asset- liability mismatch for the banks.
They in turn are forcing borrowers to liquidate assets often at throwaway prices.
 If this continues no businessman will have any appetite to embark on infrastructure
projects. How can we get out of this hole?
 India needs to develop a market for long term debt ring fenced according to maturity. In
other words funds raised for 20 year say should fund projects for 20 years. The world
over, the longest term investors are insurers and pension funds. In India insurers find it
difficult to invest in long term project debt. Rules must change and special vehicles
meant to develop infrastructure, such as IDFCBSE 2.23% and IIFCL, must develop the
expertise to vet projects and guarantee their debt services.

Page | 52
 LITERATURE REVIEWS

In the development and developing countries, many studies have been conducted to test the
impact banking lending with respect to monetary policy announcements in India, only very
few studies has been conducted. Some of the select studies relevant to the present study are
reviewed.
The study “ the effects of Monetary policy on bank lending and aggregate output (2005)
explains Asymmetric from Nonlinearities in the lending channel is also reflect asymmetric
effects of monetary policy whether contractionary and expansionary policies have
asymmetric impacts on bank loans and whether there are further differences in the response
of small banks and big banks to policy actions. We also investigate the link is to
simultaneously capture the existence of the lending view of the monetary transmission
mechanism the strong relationship between loan growth and output growth and the
asymmetric effect of monetary policy on output. This study uses a nonlinear vector
autoregressive approach to carry out our analysis. Result show that asymmetry in the
response of bank lending to monetary policy is not a substantially contribution factor in
explaining the different responses of output to contractionary and expansionary policy.
Monetary policy and long-term Real rates. It document that changes in the stance of
monetary policy have surprisingly strong effects on very distance forward real interest rates.
Concretely we show that a 100 basis –point increase in the 2 year normal yield on a Federal
Open markets committee announcement day which we use as a proxy for changes in
expectations regarding the path of the Federal funds rate over the following several quarters
is associated with a 42 bps increase in the 10 year forward overnight real rate, extracted from
the yield curve for Treasury inflation protected securities.

Page | 53
The bank lending channel of monetary policy and its effects on mortgage Lending (May,
2010) explains the bank lending channel suggest that banks play a special role in the
transaction of monetary policy. In this theory monetary policy has an effect on banks cost of
fund in addition to the change in the risk free rate lending to an additional response in bank
lending. The supply of intermediated credit therefore has a unique response to monetary
policy. To analyze the bank lending channel, the study the response of banks to monetary
policy in the context of mortgage funds and mortgage lending. We focus on lending in
subprime communities, because it is a form if information intensive lending which affects
banks choice in funding sources and their response to changes in funding costs. Our paper
helps explain how mortgage loan supply response to monetary policy by addressing the role
of banks in the transmission of monetary policy.

- Financial management I’M Pandey

Page | 54
 RESEARCH METHODOLOGY

Statement of the problem

Repo rate and other monetary ratio are important measurers which control the liquidity in the
market. Changes in repo rate have direct impact on bank’s cost of borrowing, general people
interested to know the interest rate of loan and deposit in banking sector duration the change
in repo rate and other monetary rate announcement period.

In the recent small and medium scale investor in property market may not aware about loan
rate movements in banking sector after the announcement of repo rate this change at what
level affect their EMI. Hence, the present study is an attempt to test the impact of rising repo
rate on bank’s lending.

Objectives of the study

The following are the objective of the study.

 To analyze the impact of repo rate on bank’s interest rate after announcement period.
 To test the relationship between repo rate and bank interest rate.
 Analysis the relationship between interest rate and bank rate.

Important/ needs of the study

 The study aims to help investor and general person to making investment by providing
adequate information about impact of change in repo rate which help to take making strategy
for their EMI.

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Hypothesis of the study:
The following hypotheses are tested in this study.
 NH0: There is significant impact of repo rate on banking interest rate
 NH1: There is no significant impact of repo rate on banking interest rate

Sample selection:-
 The sample for this study included repo rate and reverse repo rate and bank interest rate
mentioned on RBI website.

Size of data
• The study show when changes in repo rate on bank lending the impact of interest rate
during period 2015 to 2018.
Sources and collection of the data:-
• The study use mainly secondary data. Information relating to repo rate and based rate
data. The announcement reverse repo rate and cash reserves ratio change were collected
from the website www.rbi.org the other related sources were obtain from books journals
and website.
Period of the study
• The study period between the 2015 to 2018 changes in repo rate and bank interest rate
when officially announcement. The major impact on interest rate.

Research Tools
• Co-efficient of correlation

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 (CO-EFFICIENT OF CORRELATION)

X (Repo Y (Interest XY X2 Y2
rate) rate)
6.00 8.70 52.20 36.00 75.69
6.00 8.65 51.90 36.00 74.82
6.25 8.95 55.94 39.06 80.10
6.25 9.00 56.25 39.06 81.00
6.25 9.10 56.88 39.06 82.81
6.50 9.25 60.13 42.25 85.56
6.50 9.20 59.80 42.25 84.64
6.75 9.30 62.78 45.56 86.49
7.50 9.70 72.75 56.25 94.09
7.75 9.85 76.34 60.06 97.02
8.00 10.00 80.00 64.00 100.00
73.75 101.70 684.95 499.56 942.23

x = 73.75/11
= 6.75
Y = 101.70/11
= 9.25

Coefficient of correlation (r) = ∑xy

∑x2* ∑ y2
942.23
499.56*942.23

942.23
22.35*30.69
942.23
685.92
= 1.00 (Perfectly Positive co-relationship)

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 NH0: There is significant impact of repo rate on banking interest rate.

Interpretation:

 Here is the coefficient of correlation value (X) taken as the repo rate and value (Y) is

considered as the Bank interest rate charging from the client in the form of given loan for the

specific period of time.

 Co-efficient of correlation is suggesting that between X and Y value two variables degree of

relationship either positive or negative relationship.

 After calculating finding the value between two variable X and Y showing result r = 1.00 is

the perfectly positive relationship.

 So we can say that when repo rate is increase and bank interest rate also increase. On other

side when repo rate is decrease and also decrease bank interest rate and EMI’s also cheapest

and bank cost of borrowing cheap .

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 FINDINGS

 We are finding that relationship between the two variable X (changes in Repo rate and Y
(landing interest rate) coefficient of correlation.
 We are comparing between the Repo rate and bank interest are what are the major impact
of bank interest rate.
 We are calculation with the help of correlation between the repo rate and Interest rate
whenever any official announcement of changes in repo rate from RBI any reason
fluctuation in repo rate either increase or decrease major impact on bank cost of
borrowing which lending from RBI.
 Whenever repo rate is high and bank no having liquidity at the time bank is borrowing
money form the RBI for the short period and bank paying high liquidity to the RBI with
interest and also cost of borrowing is very high.
 Other side whenever repo rate is cheap due to directly impact on bank interest rate which
bank will be charge from the client in the terms to given as a loan.
 Co-efficient of correlation after finding result 1.00 is the perfectly positive relationship
between the repo rate and bank Interest rate.

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 CONCLUSION

 The decision to raise or reduce rates depends on the demand and supply conditions not a
mere rise or fall in repo rate.
 Lending rates are directly linked to repo rates, but were dependent on banks cost of
funds.
But banks could raise lending rates in some segments, depending on the credit rating of
client and the relative cost to the banks.
 The RBI changes the repo rate etc. to control the money supply of the country this study
is an effort to understand whether reverse repo rate announcements hold any information
content for the debt market that may lead to changes in the interest rate and to test the
impact of reverse repo rate on interest rate of India banking.
 The result of the study showed that the amount of loan varies to the announcements of
reverse repo but its impact not immediately on banking loan that is becoming clearer in
the current scenario. Lending rates dependent on the cost of funds. For many quarts
deposits rate have not changed even when the repo rate went down or up. Deposits rates
in a way are linked to inflation.
 There is enough liquidity in the system so there will be no immediate increase in deposit
and lending rates. Banks have seen huge inflows in the form of FCNR (Foreign Currency
Non-Reparable) deposits and they are looking at avenues at for deploying those funds.
.

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 SUGGESTION OF STUDY

 This study suggests that any announcement of repo rate is direct impact on the bank
interest rate.
 Also consider the other environmental factors which affect the repo rate decision.
 Find out the reason behind the repo rate announcement.
 RBI changes of repo rate what the major impact on the bank interest rate.

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 BIBLIOGRAPHY

 A.K. capital Services LTD. (N.D.) Basis of debt market. Knowledge center,4
 Economics times, (March 31, 2014) four reasons why Raghurajan may not tinker rates on
April 1, policy.
 Harsh it Harlalka Q.M (2014) why did RBI repo rate to 8.0% and why it may not
potentially rates for the banks help inflation banking India.
 International E, (Jan 2014) consumer lending in India, Euro monitor.
 www.tradingeconomics .com
 www.policybazar.com
 www.rbi.org
 Research paper Sodhganga

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Thank you

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