Description
Monetary and Credit Policy of RBI
CRR
BANKING IN HISTORICAL PERSPECTIVE
? The origin of banking in India - traced back to the Vedic ? ?
? ?
period. The transformation from pure money lending to proper banking - before the times of Manu. Manu, a great Hindu jurist, has devoted a section of his work explaining the deposits and advances and he even laid down certain rules on rates of interest. Through out Mauryan period and later desi bankers played some role in the economy of the country. Moghul period that indigenous bankers started playing a vital role in lending money and financing of the foreign trade and commerce.
BANKING DURING BRITISH PERIOD BEFORE INDEPENDENCE
? ? ? ?
?
?
?
?
?
The first joint stock bank, namely The General Bank of India established in 1786. Later on Bank of Hindustan and Bengal Bank also came into existence. Bank of Hindustan carried on the business till 1906. East India Company established - The Bank of Bengal in 1809, The Bank of Bombay in 1840, and Bank of Madras in 1843. They were collectively called Presidency Banks and were well functioning independent units. The three banks were amalgamated in 1920 and a new bank called Imperial Bank of India was established. A number of private banks had been established by the businessmen from mid of the 19th century onwards. In the Swadeshi movement, a number of banks with Indian management, namely, Punjab National Bank Ltd., Bank of India Ltd., Canara Bank Ltd, Indian Bank Ltd. etc. were established. The Reserve Bank of India was established as the Central bank of the country in 1935 under an act called Reserve bank of India Act. Later on with the passage of the Banking Regulation Act passed in 1949, RBI was brought under government control. Under this Act, RBI was conferred with supervision and control of the banks and licensing powers and the authority to conduct inspections was also given to it.
AFTER INDEPENDENCE
? In 1955, the Imperial Bank of India was nationalised
? ? ? ?
?
and was given the name "State Bank of India". It was established under State Bank of India Act, 1955. In 1960, RBI was empowered to force the compulsory merger of the weak banks with the strong ones. This led to reduction in the number of banks from 566 in 1951 to about 89 in 1969. On July 19, 1969, 14 major banks were nationalised. In 1980, another six banks were nationalised, and thus raising the number of nationalised banks to 20. On the suggestions of Narsimham Committee, the Banking Regulation Act was amended in 1993 and thus the gates for the new private sector banks were opened
PRESENT STRUCTURE OF INDIAN BANKING SYSTEM
? Reserve Bank of India (RBI) is the Central
Bank and all Banks in India are required to follow the guidelines issued by RBI. The present structure of Indian Banking System is as follows
ublic Sector Banks ? Private Sector Banks ? Cooperative Banks ? Development Banks ? Foreign Banks
?
MONETARY AND CREDIT POLICY of RBI
? RBI Governor every year makes two policy
announcements and these are always considered as important event in the Indian financial circles and have great bearing on the Indian economy. ? Two policy announcements made every year - usually, one in April (known as slack season policy) and the second in October (known as busy season policy) are eagerly awaited by all bankers. ? Previously these were called Credit Policies or Monetary and Credit Policy. ? However, now a days RBI, announces its "Annual Policy Statement" for the entire year, sometime in April and then reviews the same in October.
MONETARY AND CREDIT POLICY of RBI
? The slack season policy is called so, as it takes
policy decision for the period when rains set in the Indian economy and economic activity is at a low ebb. ? This policy is popularly known as the "slack season policy". ? However the policy announced in October addresses the requirements of a period when hectic business activity takes place.
MONETARY AND CREDIT POLICY of RBI
? The policy is usually keenly awaited, it sets the rules
and regulations for the Indian banking sector for the next half year or so. ? The Annual Monetary and Credit Policy announced in April/May and the Mid-term Review in October/ November serve several purposes e.g.
?
?
?
Framework / supplement to the monetary and other relevant measures that are taken from time to time to capture events affecting macroeconomic assessments, in particular relating to fiscal management as well as seasonal factors; and To set out the logic, intentions and actions related to the structural and prudential aspects of the financial sector in our country. Further, the biannual Statements add to greater transparency, better communication and contribute to an effective consultation process.
MONETARY AND CREDIT POLICY of RBI
? Through these Policy announcements, RBI usually covers the
following areas :?
?
?
Domestic Developments : These include the GDP, inflation / price, money supply, food and non-food credit, data etc during the last year or so and the projections for the same for the forthcoming period. The behavior of various markets and the likely scenario on interest rates front etc. External Developments : The global economic scenario during the last year and the likely impact of the major concerns at the global level. The movements of the rupee vs major currencies of the world and the concerns for foreign exchange reserves etc. Major achievements or deficiencies in export and import sectors. Measures to be initiated for economic growth etc. : The policy announcements give brief details of various measures already initiated or likely to be initiated for financial sectors. These include changes in SLR, CRR, Bank Rate etc. The major policy steps for risk management, control of credit, customer services also form part of the policy announcements.
What is CRR
? CRR means Cash Reserve Ratio. ? Under section 42 (1) of RBI act, 1934, every
scheduled commercial bank is required to maintain with the RBI every fortnight a minimum average daily cash reserve equivalent to 3% of its Net Demand and Time Liabilities (NDTL) outstanding as on the Friday of the previous week. ? The RBI is empowered to vary the CRR between 3% and 15%.
What is CRR
? CRR is one of the important weapons available
to the Central Bank of a country to influence and control the monetary aggregates of the country. ? RBI is using the CRR either to impound the excess liquidity or to release funds needed for the economy from time to time. ? CRR also ensures that a portion of bank deposits is totally risk-free and in times of crisis the bank has at least certain minimum cash balance with RBI.
What is CRR
? CRR is maintained at fortnightly average basis on
reporting Friday. ? To avoid any wide fluctuations in CRR maintenance by banks, RBI has issued guidelines whereby a minimum of 70% of the CRR required to be maintained has to be maintained on daily basis.
Maintenance of CRR on Daily basis
? With a view to providing flexibility to banks in choosing
an optimum strategy of holding reserves depending upon their intra period cash flows, all Scheduled Commercial Banks, are required to maintain minimum CRR balances upto 70 per cent of the total CRR requirement on all days of the fortnight with effect from the fortnight beginning December 28, 2002. ? If any Scheduled Commercial Bank fails to observe the minimum level of CRR on any day/s during the relevant fortnight, the bank will not be paid interest to the extent of one fourteenth of the eligible amount of interest, even if there is no shortfall in the CRR on average basis.
What is SLR
? SLR means Statutory Liquidity Ratio.
? The ratio of liquid assets to demand and time liabilities is
known as Statutory Liquidity Ratio (SLR). ? Under section 24 (b) of the Banking Regulation Act, 1949, every bank is required to maintain at the close of business every day, a minimum proportion (at least 25%) of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. ? The RBI is empowered to increase the SLR upto 40%.
NDTL
? The calculation of the NDTL is a complex issue as
RBI keeps on issuing finer guidelines as to what is to be include and what is to be excluded from NDTL based on the clarifications sought by banks and as per requirements of the banking sector. However, the following broad terms will explain the items that are used for computation of the NDTL
NDTL
? Demand Liabilities: 'Demand Liabilities' include all
liabilities which are payable on demand and they include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees, balances in overdue fixed deposits, cash certificates and cumulative/recurring deposits, outstanding Telegraphic Transfers (TTs), Mail Transfer (MTs), Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand. Money at Call and Short Notice from outside the Banking System should be shown against liability to others.
NDTL
? Time Liabilities : Time Liabilities are those
which are payable otherwise than on demand and they include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit if not payable on demand, deposits held as securities for advances which are not payable on demand, India Millennium Deposits and Gold Deposits.
NDTL
? Borrowings from banks abroad ? Loans/borrowings from abroad by banks in India will be considered as 'liabilities ? to others' and will be subject to reserve requirements.
NDTL
? Arrangements with correspondent banks for remittance
facilities
?
?
When a bank accepts funds from a client under its remittance facilities scheme, it becomes a liability (liability to others) in its books. The liability of the bank accepting funds will extinguish only when the correspondent bank honours the drafts issued by the accepting bank to its customers. As such, the balance amount in respect of the drafts issued by the accepting bank on its correspondent bank under the remittance facilities scheme and remaining unpaid should be reflected in the accepting bank's books as an outside liability and the same should also be taken into account for computation of NDTL for CRR/SLR purpose. The amount received by correspondent banks has to be shown as 'Liability to the Banking System' by them and not as 'Liability to others' and this liability could be netted off by the correspondent banks against the inter-bank assets. Likewise sums placed by banks issuing drafts/interest/dividend warrants are to be treated as 'Assets with Banking System' in their books and can be netted off from their interbank liabilities.
NDTL
? Other Demand and Time Liabilities (ODTL)
?
Other Demand and Time Liabilities (ODTL) include
? ? ? ? ? ?
interest accrued on deposits, bills payable, unpaid dividends, suspense account balances representing amounts due to other banks or public, net credit balances in branch adjustment account, any amounts due to the "Banking System" which are not in the nature of deposits or borrowing.
?
Such liabilities may arise due to items, like • collection of bills on behalf of other banks, • interest due to other banks and so on.
? ?
? ?
Participation Certificate issued to other banks, the balances outstanding in the blocked account pertaining to segregated outstanding credit entries for more than 5 years in inter branch adjustment account, the margin money on bills purchased / discounted and gold borrowed by banks from abroad, also should be included in ODTL.
Impact of change in CRR / SLR
? CRR and SLR have been used by RBI in the past very effectively to
control the liquidity in the market. An increase in CRR or SLR used to suck liquidity from the market and thus hardening the interest rates. On the other hand lowering of these results in higher liquidity in the system and thus softening interest rates. ? After the reform process when SLR has already been reduced to the minimum level of 25% and thus it has lost most of its relevance. Moreover, most of the banks have investments in approved securities much more than the minimum required levels of SLR. Thus, in the present circumstances, the SLR has lost its edge as a tool to control liquidity. ? CRR is still relevant as banks do not keep extra funds with RBI and always try to invest the extra funds in call money, Repo, Treasury Bills or in government securities so as to earn extra amount of interest.
VALUATION OF SECURITIES
? Classification and Valuation of approved securities for SLR :
?
The entire investment portfolio of the banks (including SLR securities and non-SLR securities) should be classified under three categories viz. 'Held to Maturity', 'Available for Sale' and 'Held for Trading'. However, in the Balance Sheet, the investments will continue to be disclosed as per the existing six classifications viz.
? ? ? ? ? ?
Government securities, Other approved securities, Shares, Debentures & Bonds, Subsidiaries/joint ventures and Others (CP, Mutual Fund Units, etc.).
?
Banks should decide the category of the investment at the time of acquisition and the decision should be recorded on the investment proposals.
Valuation of securities for SLR
? Held to Maturity ? Investments classified under Held to Maturity category need not be marked to market and will be carried at acquisition cost unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity. ? Banks should recognise any diminution, other than temporary, in the value of their investments in subsidiaries/ joint ventures which are included under Held to Maturity category and provide thereof. ? Such diminution should be determined and provided for each investment individually
Valuation of securities for SLR
? Available for Sale ? The individual scrips in the Available for Sale category will be marked to market at the quarterly or at more frequent intervals. While the net depreciation under each classification should be recognised and fully provided for, the net appreciation under each classification should be ignored. ? The book value of the individual securities would not undergo any change after the revaluation
Valuation of securities for SLR
? Held for Trading ? The individual scrips in the Held for Trading category will be marked to market at monthly or at more frequent intervals as in the case of those in the Available for Sale category. ? The book value of the individual securities in this category would not undergo any change after marking to market.
NATURE OF MONEY MARKET INSTRUMENTS
? The money market is a market for short term instruments. ? They are considered as the most liquid of all the investments and ? ? ?
?
are frequently referred as “Near Money Instruments”. The instruments of less than one year maturity is referred to as money market instruments. This market acts as an equilibrating mechanism and helps to deploy or borrow funds for short durations. Although money market is frequently considered as a separate market, but in reality it is only a sub-section of the fixed income bond market. The only difference between the money market and the bond market is that the money market specializes in a short term debt securities and they these are sometimes referred as “cash investments” also.
FEATURES OF THE MONEY MARKET INSTRUMENTS
? Maturity of the instruments is less than 1 year ? They are generally unsecured ? Dominated by large institutional players ? Issued in the form of - promissory notes / receipt
of deposits
TYPES OF MONEY MARKET INSTRUMENTS
? Call Money / Notice Money ? Term Money ? Treasury Bills ? Repo and Reverse Repo
? Commercial Paper
? Certificate of Deposits ? Bills Rediscounting
? Inter corporate Deposits
? Liquid Mutual Funds
CALL / NOTICE MONEY
? Historically this market has few players and restricted
to commercial, cooperative and foreign banks and primary dealers. ? The Calls are placed for overnight, whereas Notice Money is placed for 2 to 14 days. ? RBI issues certain guidelines for the call money market so as to avoid volatility in the market and to restrict excessive dependence on this market to meet the long term needs of the institutions. ? Some Non-banking entities like Financial Institutions, Insurance Cos., Mutual Funds are allowed only as lenders in the Call Money market.
TERM MONEY
? Inter-bank market for deposits of maturity
exceeding 14 days is called as Term Money deposits. ? In this market Financial Institutions are granted specific limits by RBI for borrowing. ? RBI puts restrictions to certain type of identities to borrow in the market. For example, Mutual Funds are not permitted to borrow under term money
COMMERCIAL PAPERS
? These are popularly called “CPs” - short term
money market instruments comprising of unsecured negotiable short term usance promissory note with fixed maturity issued at discount to the face value. ? Another important feature of these instruments is that these are freely transferable by endorsement and delivery. ? Now these can be issued only in demat form.
COMMERCIAL PAPERS
? Some other features of these are :? can be issued/ traded in multiples of Rs 5 lacs each ? minimum networth of the issuing entity should be 4 crores ? minimum rating should be AA ? issued by FIs/ Corporates/ PDs etc. ? issued for minimum of 15 days, maximum period of 1 year
CERTIFICATE OF DEPOSITS
? These are popularly called “CDs” and are short
term money market instruments comprising of unsecured negotiable short term usance promissory note with fixed maturity issued at discount to the face value. ? CD is a negotiable interest-bearing debt instrument of specific maturity issued by banks
CERTIFICATE OF DEPOSITS
? They too are freely transferable by endorsement and ?
?
? ?
delivery and are available in physical form. These are issued by banks and FIs to mobilize bulk resources and can be issued / traded in multiples of Rs.5 lacs each. CD represents the title to a TIME DEPOSIT with a bank. However, it is a liquid instrument since it can be traded in the Secondary Market. It is issued with a maturity of less than one year and is issued at a discount from the face value. Interest is the difference between the issue price and the face value, which the holder receives at maturity
BILLS REDISCOUNTING
? As per recommendations of the Narasimhan
Committee, all licensed scheduled commercial banks are eligible to rediscount with RBI, genuine trade bills arising out of sale/ purchase of goods. ? Maturity date of the bill can fall within 90 days of rediscounting. ? Primary Dealers are also permitted to rediscount bills.
INTER-CORPORATE DEPOSITS
? It is a deposit made by one corporate having
? ? ?
?
surplus funds with another Corporate/Institution. Such deposits are governed by Section 372A of The Companies Act,1956. These are Non negotiable/ non transferable. They have no secondary market. Interest rate can be fixed /floating and is decided by the parties
Types of Treasury Bills
? These are issued by RBI for different maturities,
but not exceeding 364 days. ? At present RBI issues only 91 days and 364 days Treasury Bills. ? These T-Bills, as they are popularly known in the market, are issued at discount to face value by RBI for funding the short term requirement of Central Government. ? The payment of discount and repayment of Principle is guaranteed by central government
Types of Treasury Bills
? Some of the special features of investment In
Treasury Bills are as follows :? ? ? ?
Highly liquid money market instrument Zero default risk No tax deducted at source Good returns especially in the short term
LIQUID MUTUAL FUNDS
? These are new instruments for the Indian ? ?
? ?
money market. The institutions and individuals with large surpluses can use this mode. They are unsecured money market instruments and funds are generally invested for few weeks, but exit from the Fund is usually available at a 24 hour notice. Net Asset Value is declared by the Mutual Fund on daily basis. Returns fluctuate with rise and fall of the financial markets
REPO
? Repo is short for “Repurchase Agreement”. ? It is also termed as 'Buy Back', 'RP', or 'Ready
Forward' (RF). ? It is a sale of securities with an agreement to repurchase the same on a future date and at a specific price. ? Institutions like Banks who deal in government securities use this instrument as a form of overnight borrowing.
REPO
? Under this method, a dealer or other holder of
government securities sells the securities to a lender and agrees to repurchase them at an agreed future date at an agreed price. ? They are usually very short-term, from overnight to 30 days or more. ? This short-term maturity and government backing means repos provide lenders with extremely low risk. ? Repo is the sale of a security with a commitment to repurchase the same security at a specified price on a specified date for a pre-determined period.
REVERSE REPO
? The term 'REVERSE REPURCHASE
AGREEMENT' (Reverse Repo) refers to a repos deal viewed from the perspective of the supplier of funds. ? In this case, the assets are bought with an agreement to resell them at a fixed price on a future date. ? Thus transaction is called Repo for the institution who is a borrowing the money and it is “Reverse Repo” for the institution who is lending the money.
Term Repo
? It is exactly the same as “Repo” except that the
period of borrowing / lending is greater than 30 days
Market Repo
? In the Monetary Policy 2005-06, RBI declared the
following in respect of REPO market:?
An electronic trading platform for conduct of market repo operations in government securities, in addition to the existing voice based system to be facilitated. ? Participation in market repo facility in government securities for non-scheduled urban co-operative banks (UCBs) and listed companies having gilt accounts with scheduled commercial banks will be allowed subject to eligibility criteria and safeguards
Repo / Reverse Repo
? Thus now, the operations whereby RBI injects liquidity in
? ? ? ?
the system are termed as “Repo”, and whereby the Central Bank absorbs liquidity are termed as “Reverse Repo” RBI absorbs surplus funds from banks through its daily reverse repo auctions. A hike in reverse repo rates will usually immediately lead to higher yields in the short term papers e.g. Treasury Bills Repo rate are generally linked to the reverse repo rate. The spread between the reverse repo rate and the repo rate had been reduced by 25 basis points from 125 basis points to 100 basis points and raised to 125 basis points
doc_171725587.pptx
Monetary and Credit Policy of RBI
CRR
BANKING IN HISTORICAL PERSPECTIVE
? The origin of banking in India - traced back to the Vedic ? ?
? ?
period. The transformation from pure money lending to proper banking - before the times of Manu. Manu, a great Hindu jurist, has devoted a section of his work explaining the deposits and advances and he even laid down certain rules on rates of interest. Through out Mauryan period and later desi bankers played some role in the economy of the country. Moghul period that indigenous bankers started playing a vital role in lending money and financing of the foreign trade and commerce.
BANKING DURING BRITISH PERIOD BEFORE INDEPENDENCE
? ? ? ?
?
?
?
?
?
The first joint stock bank, namely The General Bank of India established in 1786. Later on Bank of Hindustan and Bengal Bank also came into existence. Bank of Hindustan carried on the business till 1906. East India Company established - The Bank of Bengal in 1809, The Bank of Bombay in 1840, and Bank of Madras in 1843. They were collectively called Presidency Banks and were well functioning independent units. The three banks were amalgamated in 1920 and a new bank called Imperial Bank of India was established. A number of private banks had been established by the businessmen from mid of the 19th century onwards. In the Swadeshi movement, a number of banks with Indian management, namely, Punjab National Bank Ltd., Bank of India Ltd., Canara Bank Ltd, Indian Bank Ltd. etc. were established. The Reserve Bank of India was established as the Central bank of the country in 1935 under an act called Reserve bank of India Act. Later on with the passage of the Banking Regulation Act passed in 1949, RBI was brought under government control. Under this Act, RBI was conferred with supervision and control of the banks and licensing powers and the authority to conduct inspections was also given to it.
AFTER INDEPENDENCE
? In 1955, the Imperial Bank of India was nationalised
? ? ? ?
?
and was given the name "State Bank of India". It was established under State Bank of India Act, 1955. In 1960, RBI was empowered to force the compulsory merger of the weak banks with the strong ones. This led to reduction in the number of banks from 566 in 1951 to about 89 in 1969. On July 19, 1969, 14 major banks were nationalised. In 1980, another six banks were nationalised, and thus raising the number of nationalised banks to 20. On the suggestions of Narsimham Committee, the Banking Regulation Act was amended in 1993 and thus the gates for the new private sector banks were opened
PRESENT STRUCTURE OF INDIAN BANKING SYSTEM
? Reserve Bank of India (RBI) is the Central
Bank and all Banks in India are required to follow the guidelines issued by RBI. The present structure of Indian Banking System is as follows
ublic Sector Banks ? Private Sector Banks ? Cooperative Banks ? Development Banks ? Foreign Banks?
MONETARY AND CREDIT POLICY of RBI
? RBI Governor every year makes two policy
announcements and these are always considered as important event in the Indian financial circles and have great bearing on the Indian economy. ? Two policy announcements made every year - usually, one in April (known as slack season policy) and the second in October (known as busy season policy) are eagerly awaited by all bankers. ? Previously these were called Credit Policies or Monetary and Credit Policy. ? However, now a days RBI, announces its "Annual Policy Statement" for the entire year, sometime in April and then reviews the same in October.
MONETARY AND CREDIT POLICY of RBI
? The slack season policy is called so, as it takes
policy decision for the period when rains set in the Indian economy and economic activity is at a low ebb. ? This policy is popularly known as the "slack season policy". ? However the policy announced in October addresses the requirements of a period when hectic business activity takes place.
MONETARY AND CREDIT POLICY of RBI
? The policy is usually keenly awaited, it sets the rules
and regulations for the Indian banking sector for the next half year or so. ? The Annual Monetary and Credit Policy announced in April/May and the Mid-term Review in October/ November serve several purposes e.g.
?
?
?
Framework / supplement to the monetary and other relevant measures that are taken from time to time to capture events affecting macroeconomic assessments, in particular relating to fiscal management as well as seasonal factors; and To set out the logic, intentions and actions related to the structural and prudential aspects of the financial sector in our country. Further, the biannual Statements add to greater transparency, better communication and contribute to an effective consultation process.
MONETARY AND CREDIT POLICY of RBI
? Through these Policy announcements, RBI usually covers the
following areas :?
?
?
Domestic Developments : These include the GDP, inflation / price, money supply, food and non-food credit, data etc during the last year or so and the projections for the same for the forthcoming period. The behavior of various markets and the likely scenario on interest rates front etc. External Developments : The global economic scenario during the last year and the likely impact of the major concerns at the global level. The movements of the rupee vs major currencies of the world and the concerns for foreign exchange reserves etc. Major achievements or deficiencies in export and import sectors. Measures to be initiated for economic growth etc. : The policy announcements give brief details of various measures already initiated or likely to be initiated for financial sectors. These include changes in SLR, CRR, Bank Rate etc. The major policy steps for risk management, control of credit, customer services also form part of the policy announcements.
What is CRR
? CRR means Cash Reserve Ratio. ? Under section 42 (1) of RBI act, 1934, every
scheduled commercial bank is required to maintain with the RBI every fortnight a minimum average daily cash reserve equivalent to 3% of its Net Demand and Time Liabilities (NDTL) outstanding as on the Friday of the previous week. ? The RBI is empowered to vary the CRR between 3% and 15%.
What is CRR
? CRR is one of the important weapons available
to the Central Bank of a country to influence and control the monetary aggregates of the country. ? RBI is using the CRR either to impound the excess liquidity or to release funds needed for the economy from time to time. ? CRR also ensures that a portion of bank deposits is totally risk-free and in times of crisis the bank has at least certain minimum cash balance with RBI.
What is CRR
? CRR is maintained at fortnightly average basis on
reporting Friday. ? To avoid any wide fluctuations in CRR maintenance by banks, RBI has issued guidelines whereby a minimum of 70% of the CRR required to be maintained has to be maintained on daily basis.
Maintenance of CRR on Daily basis
? With a view to providing flexibility to banks in choosing
an optimum strategy of holding reserves depending upon their intra period cash flows, all Scheduled Commercial Banks, are required to maintain minimum CRR balances upto 70 per cent of the total CRR requirement on all days of the fortnight with effect from the fortnight beginning December 28, 2002. ? If any Scheduled Commercial Bank fails to observe the minimum level of CRR on any day/s during the relevant fortnight, the bank will not be paid interest to the extent of one fourteenth of the eligible amount of interest, even if there is no shortfall in the CRR on average basis.
What is SLR
? SLR means Statutory Liquidity Ratio.
? The ratio of liquid assets to demand and time liabilities is
known as Statutory Liquidity Ratio (SLR). ? Under section 24 (b) of the Banking Regulation Act, 1949, every bank is required to maintain at the close of business every day, a minimum proportion (at least 25%) of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. ? The RBI is empowered to increase the SLR upto 40%.
NDTL
? The calculation of the NDTL is a complex issue as
RBI keeps on issuing finer guidelines as to what is to be include and what is to be excluded from NDTL based on the clarifications sought by banks and as per requirements of the banking sector. However, the following broad terms will explain the items that are used for computation of the NDTL
NDTL
? Demand Liabilities: 'Demand Liabilities' include all
liabilities which are payable on demand and they include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees, balances in overdue fixed deposits, cash certificates and cumulative/recurring deposits, outstanding Telegraphic Transfers (TTs), Mail Transfer (MTs), Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand. Money at Call and Short Notice from outside the Banking System should be shown against liability to others.
NDTL
? Time Liabilities : Time Liabilities are those
which are payable otherwise than on demand and they include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit if not payable on demand, deposits held as securities for advances which are not payable on demand, India Millennium Deposits and Gold Deposits.
NDTL
? Borrowings from banks abroad ? Loans/borrowings from abroad by banks in India will be considered as 'liabilities ? to others' and will be subject to reserve requirements.
NDTL
? Arrangements with correspondent banks for remittance
facilities
?
?
When a bank accepts funds from a client under its remittance facilities scheme, it becomes a liability (liability to others) in its books. The liability of the bank accepting funds will extinguish only when the correspondent bank honours the drafts issued by the accepting bank to its customers. As such, the balance amount in respect of the drafts issued by the accepting bank on its correspondent bank under the remittance facilities scheme and remaining unpaid should be reflected in the accepting bank's books as an outside liability and the same should also be taken into account for computation of NDTL for CRR/SLR purpose. The amount received by correspondent banks has to be shown as 'Liability to the Banking System' by them and not as 'Liability to others' and this liability could be netted off by the correspondent banks against the inter-bank assets. Likewise sums placed by banks issuing drafts/interest/dividend warrants are to be treated as 'Assets with Banking System' in their books and can be netted off from their interbank liabilities.
NDTL
? Other Demand and Time Liabilities (ODTL)
?
Other Demand and Time Liabilities (ODTL) include
? ? ? ? ? ?
interest accrued on deposits, bills payable, unpaid dividends, suspense account balances representing amounts due to other banks or public, net credit balances in branch adjustment account, any amounts due to the "Banking System" which are not in the nature of deposits or borrowing.
?
Such liabilities may arise due to items, like • collection of bills on behalf of other banks, • interest due to other banks and so on.
? ?
? ?
Participation Certificate issued to other banks, the balances outstanding in the blocked account pertaining to segregated outstanding credit entries for more than 5 years in inter branch adjustment account, the margin money on bills purchased / discounted and gold borrowed by banks from abroad, also should be included in ODTL.
Impact of change in CRR / SLR
? CRR and SLR have been used by RBI in the past very effectively to
control the liquidity in the market. An increase in CRR or SLR used to suck liquidity from the market and thus hardening the interest rates. On the other hand lowering of these results in higher liquidity in the system and thus softening interest rates. ? After the reform process when SLR has already been reduced to the minimum level of 25% and thus it has lost most of its relevance. Moreover, most of the banks have investments in approved securities much more than the minimum required levels of SLR. Thus, in the present circumstances, the SLR has lost its edge as a tool to control liquidity. ? CRR is still relevant as banks do not keep extra funds with RBI and always try to invest the extra funds in call money, Repo, Treasury Bills or in government securities so as to earn extra amount of interest.
VALUATION OF SECURITIES
? Classification and Valuation of approved securities for SLR :
?
The entire investment portfolio of the banks (including SLR securities and non-SLR securities) should be classified under three categories viz. 'Held to Maturity', 'Available for Sale' and 'Held for Trading'. However, in the Balance Sheet, the investments will continue to be disclosed as per the existing six classifications viz.
? ? ? ? ? ?
Government securities, Other approved securities, Shares, Debentures & Bonds, Subsidiaries/joint ventures and Others (CP, Mutual Fund Units, etc.).
?
Banks should decide the category of the investment at the time of acquisition and the decision should be recorded on the investment proposals.
Valuation of securities for SLR
? Held to Maturity ? Investments classified under Held to Maturity category need not be marked to market and will be carried at acquisition cost unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity. ? Banks should recognise any diminution, other than temporary, in the value of their investments in subsidiaries/ joint ventures which are included under Held to Maturity category and provide thereof. ? Such diminution should be determined and provided for each investment individually
Valuation of securities for SLR
? Available for Sale ? The individual scrips in the Available for Sale category will be marked to market at the quarterly or at more frequent intervals. While the net depreciation under each classification should be recognised and fully provided for, the net appreciation under each classification should be ignored. ? The book value of the individual securities would not undergo any change after the revaluation
Valuation of securities for SLR
? Held for Trading ? The individual scrips in the Held for Trading category will be marked to market at monthly or at more frequent intervals as in the case of those in the Available for Sale category. ? The book value of the individual securities in this category would not undergo any change after marking to market.
NATURE OF MONEY MARKET INSTRUMENTS
? The money market is a market for short term instruments. ? They are considered as the most liquid of all the investments and ? ? ?
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are frequently referred as “Near Money Instruments”. The instruments of less than one year maturity is referred to as money market instruments. This market acts as an equilibrating mechanism and helps to deploy or borrow funds for short durations. Although money market is frequently considered as a separate market, but in reality it is only a sub-section of the fixed income bond market. The only difference between the money market and the bond market is that the money market specializes in a short term debt securities and they these are sometimes referred as “cash investments” also.
FEATURES OF THE MONEY MARKET INSTRUMENTS
? Maturity of the instruments is less than 1 year ? They are generally unsecured ? Dominated by large institutional players ? Issued in the form of - promissory notes / receipt
of deposits
TYPES OF MONEY MARKET INSTRUMENTS
? Call Money / Notice Money ? Term Money ? Treasury Bills ? Repo and Reverse Repo
? Commercial Paper
? Certificate of Deposits ? Bills Rediscounting
? Inter corporate Deposits
? Liquid Mutual Funds
CALL / NOTICE MONEY
? Historically this market has few players and restricted
to commercial, cooperative and foreign banks and primary dealers. ? The Calls are placed for overnight, whereas Notice Money is placed for 2 to 14 days. ? RBI issues certain guidelines for the call money market so as to avoid volatility in the market and to restrict excessive dependence on this market to meet the long term needs of the institutions. ? Some Non-banking entities like Financial Institutions, Insurance Cos., Mutual Funds are allowed only as lenders in the Call Money market.
TERM MONEY
? Inter-bank market for deposits of maturity
exceeding 14 days is called as Term Money deposits. ? In this market Financial Institutions are granted specific limits by RBI for borrowing. ? RBI puts restrictions to certain type of identities to borrow in the market. For example, Mutual Funds are not permitted to borrow under term money
COMMERCIAL PAPERS
? These are popularly called “CPs” - short term
money market instruments comprising of unsecured negotiable short term usance promissory note with fixed maturity issued at discount to the face value. ? Another important feature of these instruments is that these are freely transferable by endorsement and delivery. ? Now these can be issued only in demat form.
COMMERCIAL PAPERS
? Some other features of these are :? can be issued/ traded in multiples of Rs 5 lacs each ? minimum networth of the issuing entity should be 4 crores ? minimum rating should be AA ? issued by FIs/ Corporates/ PDs etc. ? issued for minimum of 15 days, maximum period of 1 year
CERTIFICATE OF DEPOSITS
? These are popularly called “CDs” and are short
term money market instruments comprising of unsecured negotiable short term usance promissory note with fixed maturity issued at discount to the face value. ? CD is a negotiable interest-bearing debt instrument of specific maturity issued by banks
CERTIFICATE OF DEPOSITS
? They too are freely transferable by endorsement and ?
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delivery and are available in physical form. These are issued by banks and FIs to mobilize bulk resources and can be issued / traded in multiples of Rs.5 lacs each. CD represents the title to a TIME DEPOSIT with a bank. However, it is a liquid instrument since it can be traded in the Secondary Market. It is issued with a maturity of less than one year and is issued at a discount from the face value. Interest is the difference between the issue price and the face value, which the holder receives at maturity
BILLS REDISCOUNTING
? As per recommendations of the Narasimhan
Committee, all licensed scheduled commercial banks are eligible to rediscount with RBI, genuine trade bills arising out of sale/ purchase of goods. ? Maturity date of the bill can fall within 90 days of rediscounting. ? Primary Dealers are also permitted to rediscount bills.
INTER-CORPORATE DEPOSITS
? It is a deposit made by one corporate having
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surplus funds with another Corporate/Institution. Such deposits are governed by Section 372A of The Companies Act,1956. These are Non negotiable/ non transferable. They have no secondary market. Interest rate can be fixed /floating and is decided by the parties
Types of Treasury Bills
? These are issued by RBI for different maturities,
but not exceeding 364 days. ? At present RBI issues only 91 days and 364 days Treasury Bills. ? These T-Bills, as they are popularly known in the market, are issued at discount to face value by RBI for funding the short term requirement of Central Government. ? The payment of discount and repayment of Principle is guaranteed by central government
Types of Treasury Bills
? Some of the special features of investment In
Treasury Bills are as follows :? ? ? ?
Highly liquid money market instrument Zero default risk No tax deducted at source Good returns especially in the short term
LIQUID MUTUAL FUNDS
? These are new instruments for the Indian ? ?
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money market. The institutions and individuals with large surpluses can use this mode. They are unsecured money market instruments and funds are generally invested for few weeks, but exit from the Fund is usually available at a 24 hour notice. Net Asset Value is declared by the Mutual Fund on daily basis. Returns fluctuate with rise and fall of the financial markets
REPO
? Repo is short for “Repurchase Agreement”. ? It is also termed as 'Buy Back', 'RP', or 'Ready
Forward' (RF). ? It is a sale of securities with an agreement to repurchase the same on a future date and at a specific price. ? Institutions like Banks who deal in government securities use this instrument as a form of overnight borrowing.
REPO
? Under this method, a dealer or other holder of
government securities sells the securities to a lender and agrees to repurchase them at an agreed future date at an agreed price. ? They are usually very short-term, from overnight to 30 days or more. ? This short-term maturity and government backing means repos provide lenders with extremely low risk. ? Repo is the sale of a security with a commitment to repurchase the same security at a specified price on a specified date for a pre-determined period.
REVERSE REPO
? The term 'REVERSE REPURCHASE
AGREEMENT' (Reverse Repo) refers to a repos deal viewed from the perspective of the supplier of funds. ? In this case, the assets are bought with an agreement to resell them at a fixed price on a future date. ? Thus transaction is called Repo for the institution who is a borrowing the money and it is “Reverse Repo” for the institution who is lending the money.
Term Repo
? It is exactly the same as “Repo” except that the
period of borrowing / lending is greater than 30 days
Market Repo
? In the Monetary Policy 2005-06, RBI declared the
following in respect of REPO market:?
An electronic trading platform for conduct of market repo operations in government securities, in addition to the existing voice based system to be facilitated. ? Participation in market repo facility in government securities for non-scheduled urban co-operative banks (UCBs) and listed companies having gilt accounts with scheduled commercial banks will be allowed subject to eligibility criteria and safeguards
Repo / Reverse Repo
? Thus now, the operations whereby RBI injects liquidity in
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the system are termed as “Repo”, and whereby the Central Bank absorbs liquidity are termed as “Reverse Repo” RBI absorbs surplus funds from banks through its daily reverse repo auctions. A hike in reverse repo rates will usually immediately lead to higher yields in the short term papers e.g. Treasury Bills Repo rate are generally linked to the reverse repo rate. The spread between the reverse repo rate and the repo rate had been reduced by 25 basis points from 125 basis points to 100 basis points and raised to 125 basis points
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