Question

Explain how repo contracts differ from interbank lending contracts? Thanks!

Answer 1

Repo contract is contract between investors and dealers in governement securities such as banks, NBFCs etc. In this contract, the dealers in government securties sells the securities to investor or institute for a short term borrowing and buy the securty in a day or two or a week depending on the contract.

However in case of interbank lending contract, the contract is between two banks and not investor and bank. Therefore a bank lends to another bank for short term period say a day or two or a week. The lending bank charges interest over the course of borrowing however short the period is.

If you have any doubt, ask me in the comment section.