- What is Bank Rate?
- Usage of Bank Rate
- Repo Rate vs Bank Rate
How Bank Rates are used by RBI?
Used as a Penal Rate:
- On the first day – Bank Rate + 3%
- On succeeding working day – Bank Rate + 5%
Discounting of Bill of Exchange and Commercial Papers:
Difference between Bank Rate and Repo Rate:
- At Bank rate, commercial banks borrow funds for more than 90 days, on the other hand, at Repo rate banks borrowers money for less than 90 days. In other words, on Bank Rate commercial banks fulfil their long term requirements of funds, whereas, at Repo Rate, banks fulfil their short term needs of money.
- To borrow loan at Repo rate banks has to sign a repurchase agreement of collateralised securities whereas, in case of bank rate, commercial banks don’t need to keep the RBI approved securities as collateral.
- Bank rate is always higher than the Repo rate.
- Bank rates are majorly used to discount commercial papers and Bill of exchange and also used as penal rate whereas Repo rate is a liquidity adjustment facility and exclusively used for short term loans to the commercial banks.
- A rise in Bank rate directly affects the customers directly whereas, in case of Repo rate, being a concern between bank and RBI, it doesn’t affect lending rate directly.
Hope you have understood the meaning and definition of bank rate. In a nutshell, a bank rate is implemented to the banks or financial institution for the long-term advances. Also, the bank rate is utilised by the commercial banks as a penal rate and for the purpose of re-discount the bills of exchange and commercial papers.