Interbank Lending

• Interbank lending refers to the lending of funds between two banks.

• Interbank lending typically occurs in the form of short term loans and they
are unsecured.
• Intrest rate of interbank loans are detrmined through the market forces of
demand and supply and may vary depending upon various factors.

• Aside from the market for short-term government borrowing, the interbank
market usually is one of the most liquid. The rate on interbank loans also is
an important guide for other loans and for the pricing of bonds and equities.
In normal times, the interest rate for loans to banks is lower than for other
customers: because banks are seen as low-risk borrowers, investors require
a smaller risk premium than on other loans.
 Maintening reserve
• Refers to the practice of holding a certain amount of funds or assets in
reserve in financial institution such as banks and central bank to meet
the financial obligation.
• Important for ensuring that they have sufficient liquidity to meet the
customer demand and cover unexpected losses.

• Banks make reserve in the form of cash or deposits whereas central

bank make reserve in the form of foreign currency reserve or gold as
means to support the value of their currency, managing inflation and
providing liquidity to the financial system.

• banking and financial institutions maintain 2 types of reserves. they are

cash at vault and cash reserve at central bank.

• Primary reserve refers to the cash held in banks vault and with the
central bank whereas secondary reserve refers to the additional
reserves that the bank have in excess of formal requirements. these
reserves are in the form of near cash marketable securities.
• BFI of nepal are required to maintain CRR at 4 %. and SLR for commercial
banks, development banks and finance companies has gone upto 12, 10, 11%
respectively from the existing 10,8, 7 %.
• Central bank has the authority to increase or decrease the minimum cash
reserve ratio by commercial banks.
Increse in CRR=decrease in liquidity of commercial banks
Decrease in CRR=increase in liquidity of commercial banks
Thank you