The refinancing rate is one of the most common and effective instruments with which the state regulates the state of the banking sector. If earlier the refinancing system was designed to monitor monetary circulation, in the modern world it is increasingly based on assistance to credit institutions. And it should be noted that it has been implemented for many years and quite successfully.
So, the refinancing rate is the percentage at which the national bank of a country issues a commercial loan in connection with the presence of recent temporary financial difficulties. Thus, the government ensures the reliability of individual credit institutions, and, accordingly, the stability of the entire banking system. After all, as you know, the collapse of one large commercial bank can lead to the fall of the rest, which will inevitably lead to a crisis in the economy of the entire state, and possibly on a global scale.
In practice, the refinancing rate is set by the national bank annually and is approved in the monetary policy developed by him in conjunction with state bodies. Of course, not every organization can get such a loan, but only one with a good reputation and a good credit history. Moreover, if the central bank has doubts about the solvency of a potential borrower, then it makes a final decision based on the audit report of a third-party organization. After confirming the borrower's creditworthiness, a loan is issued for a certain period, after which a commercial bank returns the amount taken, taking into account interest.
The refinancing rate is the main method for adjusting the volume of money in circulation. According to the current legislation governing the activities of credit institutions, the national bank annually approves the main aspects of monetary policy, in particular, the money supply is targeted, in other words, the ceiling is set. If in the process of analytical work it was revealed that the amount of money in circulation exceeds the limit, then the Central Bank's refinancing rate rises. This naturally leads to an increase in the cost of loans issued to the population. Then, potential borrowers have to significantly reduce costs due to the lack of funds to pay the loan. Accordingly, the opposite situation occurs if a noticeable decrease in the money supply is found.
The refinancing rate is reduced, it becomes more profitable for credit organizations to borrow funds from the national bank, which means that the interest on loans issued to the population is significantly reduced.
Thanks to the refinancing system, the state controls the rate of inflation growth, preventing the development of the process of depreciation of money. After all, when the refinancing rate is reduced to the minimum limit, the volume of money supply in circulation actively increases, which means that purchasing power rises. The uncontrolled progression of this process leads to the depreciation of money and a reduction in the supply of products on the market.
