CASH/LIQUIDITY CASH/LIQUIDITY MANAGEMENT IN BANKSMANAGEMENT IN BANKS

Presented by

Dr.S.C.BihariDr.S.C.Bihari I B S,HYDERABAD

PURPOSE, MONITORING OF CRR AND SLR

These two monetary policy measures of the RBI These two monetary policy measures of the RBI together try to ensure adequate liquidity and a together try to ensure adequate liquidity and a balanced monetary position in the system.balanced monetary position in the system.With a view to monitoring compliance of With a view to monitoring compliance of maintenance of statutory reserve requirements maintenance of statutory reserve requirements vizviz. . CRR and SLR by the SCBs, the Reserve Bank of CRR and SLR by the SCBs, the Reserve Bank of India has prescribed statutory returns India has prescribed statutory returns i.ei.e. Form A . Form A return (for CRR) under Section 42 (2) of the RBI return (for CRR) under Section 42 (2) of the RBI Act, 1934 and Form VIII return (for SLR) under Act, 1934 and Form VIII return (for SLR) under Section 24 of the Banking Regulation Act, 1949.Section 24 of the Banking Regulation Act, 1949.

WHAT IS CRRWHAT IS CRR CRR or CASH RESERVE RATIO is the average CRR or CASH RESERVE RATIO is the average

daily balance with the RBI, the percentage of daily balance with the RBI, the percentage of CRR will be specified by RBI from time to time CRR will be specified by RBI from time to time on Net Demand and Time Liabilities (NDTL) on Net Demand and Time Liabilities (NDTL)

In simple terms, it is the cash that banks deposit In simple terms, it is the cash that banks deposit with the RBI as a proportion of their deposits.with the RBI as a proportion of their deposits.

CRR is more effective in bringing about changes CRR is more effective in bringing about changes in the monetary positions since it is in the form of in the monetary positions since it is in the form of cash. cash.

What is SLR ?What is SLR ?In addition to the cash reserve ratio, the banks In addition to the cash reserve ratio, the banks are required to maintain specified reserves in the are required to maintain specified reserves in the form of government securities, specified bonds and form of government securities, specified bonds and approved securities.approved securities.These constitute the STATUTORY LIQUIDITY RATIO These constitute the STATUTORY LIQUIDITY RATIO OR SLR. The aim of SLR is twoOR SLR. The aim of SLR is two--fold: fold: (1) It provides profitability to the banks while ensuring (1) It provides profitability to the banks while ensuring liquidity since investments in government securities form a liquidity since investments in government securities form a part of their reserves. part of their reserves. (2) The statutory investment to be made in approved (2) The statutory investment to be made in approved government securities ease the governmentgovernment securities ease the governments borrowing s borrowing programme.programme.

Demand LiabilitiesDemand Liabilities

Current depositsCurrent depositsDemand Liabilities portion of savings Bank Demand Liabilities portion of savings Bank DepositsDepositsMargins held against Letters of Credit/GuaranteesMargins held against Letters of Credit/GuaranteesBalances in overdue Fixed/Cumulative /Recurring Balances in overdue Fixed/Cumulative /Recurring Deposits, Cash Certificates Deposits, Cash Certificates Outstanding Telegraphic Transfers (Outstanding Telegraphic Transfers (TTs),MailTTs),MailTransfers (Transfers (MTsMTs), Demand ), Demand Drafts(DDsDrafts(DDs))Unclaimed DepositsUnclaimed DepositsCredit balances in the Cash Credit AccountCredit balances in the Cash Credit AccountDeposits held as security for advances which are Deposits held as security for advances which are payable on demand.payable on demand.

TERM LIABILITIESTERM LIABILITIESFixed/Cumulative /Recurring DepositsFixed/Cumulative /Recurring DepositsCash CertificatesCash CertificatesTime Liabilities Portion of Savings Bank Time Liabilities Portion of Savings Bank DepositsDepositsStaff Security DepositsStaff Security DepositsMargins held against Letters of Credits, if not Margins held against Letters of Credits, if not payable on demandpayable on demandDeposits held as Securities for Advances, and Deposits held as Securities for Advances, and India Development BondsIndia Development Bonds

Other LiabilitiesOther Liabilities

Participation Certificates issued to other Participation Certificates issued to other banksbanks

Net credit balance in the interbranch Net credit balance in the interbranch adjustment accountadjustment account

Outstanding balances in blocked Outstanding balances in blocked accountsaccounts

Margin money on bills purchased/ Margin money on bills purchased/ discounted,discounted,

Gold borrowed from abroad by banksGold borrowed from abroad by banks

Paid up capital and reserve Loans taken from RBI, NABARD etc Aggregate liabilities to

SBI and Subsidiaries RRBs A banking company A cooperative bank

Excess provision for IT Amount received from DICGC, Court

Receiver, ECGC

LIABILITIES NOT TO BE INCLUDED FOR LIABILITIES NOT TO BE INCLUDED FOR NDTL COMPUTATIONNDTL COMPUTATION

CRRCRR

As per Section 42(1) of The RBI Act 1934As per Section 42(1) of The RBI Act 1934 Average daily balance with RBIAverage daily balance with RBI Minimum 4% at present, changeable by Minimum 4% at present, changeable by

RBI RBI Macro economic condition and money Macro economic condition and money

supply decide the changes by RBI from supply decide the changes by RBI from time to timetime to time

Constituents of Cash ReserveConstituents of Cash Reserve

Deposits with RBI Cash balances with currency chests For fortnight

Maintenance of CRR requirement on a daily basis which is presently 70 per cent of the total CRR requirement (99 PER CENT FROM 27-7-2013 AS NOTIFIED BY RBI AND SUBSEQUENTLY CHANGED TO 95 PER CENT)

SLRSLR

Statutory:Statutory: Section 24(2A) BR Act 1949Section 24(2A) BR Act 1949 Banking Laws (Amendment) Act 1983Banking Laws (Amendment) Act 1983 Section 18 BR ActSection 18 BR Act

Reserves in CASHReserves in CASH Gold at present market priceGold at present market price Approved securitiesApproved securities Current account balances maintained with Current account balances maintained with

PSBsPSBs

SLR contd.SLR contd.

22.5% of NDTL as on last Friday of 222.5% of NDTL as on last Friday of 2ndndpreceding fortnightpreceding fortnight

Range upto 40%Range upto 40% Objectives:Objectives:

Control the money supply for credit Control the money supply for credit purposepurpose

Augment bankAugment banks investment in Govt. s investment in Govt. securitiessecurities

Ensure solvency of banksEnsure solvency of banks

Approved SecuritiesApproved SecuritiesGovt. Promissory Note/ Govt. Promissory Note/ All State and Central Govt. LoansAll State and Central Govt. LoansAll State Development LoansAll State Development LoansState Financial Bonds, ICICI Bonds, IFCI State Financial Bonds, ICICI Bonds, IFCI Bonds, NABARD DebentureBonds, NABARD DebentureAll State Electricity Bonds and Port trust All State Electricity Bonds and Port trust bonds if they are Guaranteedbonds if they are GuaranteedMunicipal Corporation bonds / DebenturesMunicipal Corporation bonds / Debentures

Unapproved SecuritiesUnapproved Securities Units of UTIUnits of UTI Investment made by Banks under Investment made by Banks under

National Deposit Scheme, 1984National Deposit Scheme, 1984 IVPs, KVPs,FD of Sardar Sarovar IVPs, KVPs,FD of Sardar Sarovar

Narmada Nigam Limited, MTNL and Narmada Nigam Limited, MTNL and NTPC bondsNTPC bonds

Konkan Railway Bonds issued by Konkan Konkan Railway Bonds issued by Konkan Railway CorporationRailway Corporation

SLR ConstituentsSLR Constituents Cash in Hand Net current account balances with all

nationalised banks and RBI (except those for CRR)

Gold Investments in approved securities

Procedure for Computation of SLR The procedure to compute total NDTL for the The procedure to compute total NDTL for the

purpose of SLR under Section 24 (2) (B) of B.R. Act, purpose of SLR under Section 24 (2) (B) of B.R. Act, 1949 is broadly similar to the procedure followed for 1949 is broadly similar to the procedure followed for CRR.CRR.

SCBs are required to include interSCBs are required to include inter--bank term bank term deposits / term borrowing liabilities of all maturities deposits / term borrowing liabilities of all maturities in in Liabilities to the Banking SystemLiabilities to the Banking System..

Similarly, banks should include their interSimilarly, banks should include their inter--bank bank assets of term deposits and term lending of all assets of term deposits and term lending of all maturities in maturities in Assets with the Banking SystemAssets with the Banking System for for computation of NDTL for SLR purpose.computation of NDTL for SLR purpose.

Maintenance period, Penalty:Maintenance period, Penalty: FortnightFortnight The liquidity reserves for the fortnight will be The liquidity reserves for the fortnight will be

assessed based on the NDTL of the reporting assessed based on the NDTL of the reporting Friday of the preceding fortnight. Friday of the preceding fortnight.

PenaltyPenalty In cases of default in maintenance of CRR

requirement on a daily basis which is presently 99 per cent of the total CRR requirement RBI will levy a penal interest for the day the RBI will levy a penal interest for the day the

default occurs at the rate of 3 percent per annum default occurs at the rate of 3 percent per annum above the Bank Rate on the shortfall and if the above the Bank Rate on the shortfall and if the default continues for the next working day, it will default continues for the next working day, it will be increased to 5 percent per annumbe increased to 5 percent per annum

No Interest Payment on Eligible Cash Balances maintained by SCBs with

RBI under CRR In view of the amendment carried out to In view of the amendment carried out to

RBI Act 1934, omitting subRBI Act 1934, omitting sub--section (1B) section (1B) of Section 42, the Reserve Bank does not of Section 42, the Reserve Bank does not pay any interest on the CRR pay any interest on the CRR balances balances maintained by SCBs with maintained by SCBs with effect from the fortnight beginning effect from the fortnight beginning March 31, 2007.March 31, 2007.

MARGINAL STANDING MARGINAL STANDING FACILITYFACILITY

SCBs can participate in the Marginal Standing SCBs can participate in the Marginal Standing Facility (MSF) scheme introduced by Reserve Facility (MSF) scheme introduced by Reserve Bank with effect from May 09, 2011. Bank with effect from May 09, 2011.

Under this facility, the eligible entities may Under this facility, the eligible entities may borrow overnight, up to one per cent of their borrow overnight, up to one per cent of their respective NDTL outstanding at the end of the respective NDTL outstanding at the end of the second preceding fortnight.second preceding fortnight.--CHANGED TO CHANGED TO 0.50 PER CENT FROM 240.50 PER CENT FROM 24--77--2013 AS PER 2013 AS PER NOTIFICATION BY RBINOTIFICATION BY RBI

PENALTY FOR SLR PENALTY FOR SLR SHORTFALLSHORTFALL

If a banking company fails to maintain the If a banking company fails to maintain the required amount of SLR, it shall be liable to required amount of SLR, it shall be liable to pay to RBI in respect of that default, the penal pay to RBI in respect of that default, the penal interest for that day at the rate of three per interest for that day at the rate of three per cent per annum above the Bank Rate on the cent per annum above the Bank Rate on the shortfall and if the default continues on the shortfall and if the default continues on the next succeeding working day, the penal next succeeding working day, the penal interest may be increased to a rate of five per interest may be increased to a rate of five per cent per annum above the Bank Rate for the cent per annum above the Bank Rate for the concerned days of default on the shortfall.concerned days of default on the shortfall.

Return in Form VIII (SLR) Banks should submit to the Reserve Bank before 20th Banks should submit to the Reserve Bank before 20th

day of everyday of every month, a return in Form VIII showing the month, a return in Form VIII showing the amounts of SLR held on alternate Fridays during amounts of SLR held on alternate Fridays during immediate preceding month with particulars of their immediate preceding month with particulars of their DTL in India held on such Fridays or if any such Friday DTL in India held on such Fridays or if any such Friday is a Publicis a Public Holiday under the Negotiable Instruments Holiday under the Negotiable Instruments Act, 1881, at the close of business on preceding working Act, 1881, at the close of business on preceding working day.day.

ii) Banks should also submit a statement as annexure to ii) Banks should also submit a statement as annexure to Form VIIIForm VIII return giving daily position of (a) value of return giving daily position of (a) value of securities held for the purpose ofsecurities held for the purpose of compliance with SLR, compliance with SLR, and (b) the excess cash balances maintained by them and (b) the excess cash balances maintained by them with RBI in the prescribed format.with RBI in the prescribed format.

Correctness of Computation of DTL to be certified by Statutory

Auditors The Statutory Auditors should verify and The Statutory Auditors should verify and

certify that all items of outside liabilities, certify that all items of outside liabilities, as per the bankas per the banks books had been duly s books had been duly compiled by the bank and correctly compiled by the bank and correctly reflected reflected under DTL/NDTL in the under DTL/NDTL in the fortnightly/monthly statutory returns fortnightly/monthly statutory returns submitted to Reserve Bank for the submitted to Reserve Bank for the financial year. financial year.

Dr. S. C. BihariTell:9010620500 Tell:9010620500 Mail:scbihari@gmail.com

Thanks for your attention