Statutory liquidity ratio
Latest RBI Bank Rates in Indian Banking - 2020
| SLR Rate | CRR | Repo Rate |
|---|
| 18% | 3% | 4% |
1) One of the main objectives is to prevent commercial banks from liquidating their liquid assets when the RBI raises the CRR. 2) SLR is used by the RBI to control credit flow in the banks. 3) In a way, SLR also makes commercial banks invest in government securities.
statutory liquidity ratio
CRR is maintained by RBI, but RBI does not maintain SLR.So it is clear that CRR is purely a liquid or a cash component that the banks have to maintain with RBI, under the SLR requirement apart from cash, other assets such as gold and government securities viz.
Definition: Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country.
Basic differences between CRR and SLR.
| SLR (Statutory Liquidity Ratio) | Cash Reserve Ratio (CRR) |
|---|
| This ratio is used by the RBI to control the bank's leverage for credit expansion. | CRR is issued by the central bank to control the liquidity in the market. |
As per the RBI Act 1934, all Scheduled Commercial Banks (that includes public and private sector banks, foreign banks, regional rural banks and co-operative banks) are required to maintain a cash balance on average with the RBI on a fortnightly basis to cater to the CRR requirement.
Marginal Standing Facility (MSF) is the rate at which RBI lends funds overnight to the banks, which are included in the Second Schedule of Reserve Bank of India Act, 1934, against government securities.
Bank Rate and REPO rates are almost similar. The central bank(RBI for India) lends money to a private bank for which the private bank needs to pay the interest rate. The only difference is that the REPO rate is used to lend money for the short term while the bank rate for the long term.
The RBI, today, cut the repo rate by 40 basis points (bps) (100 basis points/bps = 1 per cent). The repo rate now stands at 4 per cent and reserve repo rate at 3.35 per cent. The apex bank last cut rates in its March 2020 in an advanced monetary policy review.
Standard asset for a bank is an asset that is not classified as an NPA. The asset exhibits no problem in the normal course other than the usual business risk. More specifically, according to RBI circular, sub-standard asset is an asset that has continued to remain an NPA for a period less than or equal to 1 year.
When RBI increases the CRR, less funds are available with banks as they have to keep larger protions of their cash in hand with RBI. Thus hike in CRR leads to increase of interest rates on Loans provided by the Banks. Reduction in CRR sucks money out of the system causing to decrease in money supply.
In technical terms, CRR is calculated as a percentage of net demand and time liabilities (NDTL). NDTL for banking refers to the aggregate savings account, current account and fixed deposit balances held by a bank.
The CRR is maintained with the RBI to ensure that banks have sufficient liquidity in order to handle any rush of bank withdrawals and is more of a safety measure. The RBI increases the CRR when it wants to suck out liquidity from the banking system and reduce lending capacity.
The CRR (4 per cent of NDTL) requires banks to maintain a current account with the RBI with liquid cash. While ensuring some liquid money against deposits is the primary purpose of CRR, its secondary purpose is to allow the RBI to control liquidity and rates in the economy.
Credit money is monetary value created as the result of some future obligation or claim. As such, credit money emerges from the extension of credit or issuance of debt. Virtually any form of financial instrument that cannot or is not meant to be repaid immediately can be construed as a form of credit money.
(i) In case of default in maintenance of CRR requirement on a daily basis which is presently 70 per cent of the total CRR requirement, penal interest will be recovered for that day at the rate of three per cent per annum above the Bank Rate on the amount by which the amount actually maintained falls short of the
