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There are several types of banks in India. Each of them has its functions and all of them contribute to the economic development of India in their ways by serving their target customers.
Some categories of banks in India are:
- Commercial banks
- Cooperative banks
- Specialized banks
- Regional Rural Banks
- Local Area Banks
- Small Finance Banks
- Payments Banks
But the most important bank in India is the Central Bank of India, that is, the Reserve Bank in India. The RBI is the regulatory body of all banks in India. It is also responsible for the issue and supply of the Indian currency, that is, the Indian Rupee. The RBI manages India’s main payments systems and drafts rules and regulations keeping in mind the needs of the Indian economy and the condition of the banking sector which all other banks must comply with.
What are the different functions of commercial banks?
The bank that deals with accepting and lending deposits to people for savings and investment is a commercial bank. As you know banks perform two primary functions among others: accepting deposits from their customers and lending money.
A bank accepts deposits through bank accounts that its customers are supposed to open in the banks. There are several types of bank accounts and each of them is fit for a particular purpose. For example, Savings Bank Accounts, Current Bank Accounts. Banks also accept Fixed Deposits. Each of these types has its characteristic functions that make them perfect for their purpose.
Similarly, banks lend deposits in various ways as well. Some of the ways a bank can lend money are cash credit, overdraft facility, discounting of bills, and so on. Loans as well are of various types, each carefully designed for a particular use. For example, car loans, house loans, etc.
What is the Current Base Rate?
Since lending deposits are a primary function of banks, it is obvious that banks try to maximize their profits through lending money. But how does a bank earn a profit when it is lending you money in the first place?
To earn profits, banks charge a rate of interest. As a result, when you repay your loan, you will have to pay more money than you borrowed. This surplus amount is the bank’s profit.
The Current base rate is a fixed rate below which a bank cannot lend money to its customers.
The current base rate is calculated by the RBI. The base rates set by RBI vary from time to time.
Why are the Base rates set by the RBI?
The current base rate is fixed by the RBI to bring about a sense of uniformity among all the banks. The RBI rates usually comprise all the elements of borrowing under several categories.
According to the reports by RBI, the RBI rates were set up to bring and maintain transparency in the lending and borrowing process, facilitating better loan prices, and enhancing the assessment of the monetary policies.
The Base rate helps in ensuring that banks pass on the lower cost of funds to the people it is lending money to.
What is the current base rate?
Different commercial banks offer different base rates. But all of these rates are fixed by keeping in view the rules as prescribed by the RBI. The central bank dropped the reverse repo rate by 40 basis points, bringing it down to 3.35 percent from 3.75 percent before.
What else does RBI do apart from setting the current base rate?
Since RBI is the regulatory body of all the other banks in India, it is responsible for drafting a guide for other banks to work upon. RBI enhances its control of the money available in the economy by various means. Some of them are:
- Fixes the repo rates as well as the reverse repo rates- RBI not only calculates the current base rate but also fixes the repo rate and the reverse repo rates.
- Fixes the CRR- CRR stands for Cash Reserve Ratio. CRR is the minimum amount of cash that all banks are required to maintain with them at all times.
- Last resort for the Banks- the RBI acts as the last resort for banks in case of financial emergency. Let us say a commercial bank immediately needs funds but does not have them. In such a case, it can approach the RBI and borrow the needed funds from it.
- Controls the money flow in the market- an important function of the RBI is to keep an eye on the money flow in the economy. If required, the RBI sells bonds in order to acquire surplus money from the economy.
Conclusion:
We are sure you are now aware of what a Base rate is and how it is controlled by RBI. The base rate is just one of the many tools used by RBI to maintain the order and transparency of the banking process to ensure that the customers are not forced to pay more than they should and to avoid the monopoly of banks while safeguarding the interests of the citizens.
