Some of the important aspects relating to CRR and SLR.
A: Repo rate is the rate at which
our banks borrow rupees from RBI. Whenever the banks have any shortage of funds
they can borrow it from RBI. A reduction in the repo rate will help banks to
get money at a cheaper rate. When the repo rate increases, borrowing from RBI
becomes more expensive.
2. What is Reverse Repo Rate?
A: This is exact opposite of Repo
rate. Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows
money from banks. RBI uses this tool when it feels there is too much money
floating in the banking system. Banks are always happy to lend money to RBI
since their money is in safe hands with a good interest. An increase in Reverse
repo rate can cause the banks to transfer more funds to RBI due to this
attractive interest rates.
3. What is CRR ?
A: Cash reserve Ratio (CRR) is
the amount of funds that the banks have to keep in Current Account with RBI. If
RBI decides to increase the percent of this, the available amount with the
banks comes down. RBI is using this method (increase of CRR rate), to drain out
the excessive money from the banks. Present CRR is 6%
(CRR for Scheduled Banks is As
per section 42 of RBI Act )
4. What is SLR Rate?
A: SLR (Statutory Liquidity
Ratio) is the amount a commercial bank needs to maintain in the form of cash,
or gold or govt. approved securities (Bonds) before providing credit to its
customers.
SLR rate is determined and
maintained by the RBI (Reserve Bank of India) in order to control the expansion
of bank credit. SLR is determined as the percentage of total demand and
percentage of time liabilities. Time Liabilities are the liabilities a
commercial bank liable to pay to the customers on their anytime demand. SLR is
used to control inflation and propel growth. Through SLR rate tuning the money
supply in the system can be controlled efficiently. Present SLR is 24% for
Scheduled Commercial Banks. For Scheduled Co Operative Banks SLR is 25%
(SLR for Scheduled Banks and also
Non Scheduled Banks is as per Section 24 of Banking Regulation Act)
5. What is Bank Rate?
A: Bank rate, also referred to as
the discount rate, is the rate of interest which a central bank charges on the
loans and advances that it extends to commercial banks and other financial
intermediaries. Changes in the bank rate are often used by central banks to
control the money supply. .Present Bank rate is 6%
Functions of RBI?
The Reserve Bank of India is the
central bank of India, was established on April 1, 1935 in accordance with the
provisions of the Reserve Bank of India Act, 1934. The Reserve Bank of India
was set up on the recommendations of the Hilton Young Commission. The
commission submitted its report in the year 1926, though the bank was not set
up for nine years. To regulate the issue of Bank Notes and keeping of reserves
with a view to securing monetary stability in India and generally to operate
the currency and credit system of the country to its advantage.” Banker to the
Government: performs merchant banking function for the central and the state
governments; also acts as their banker. Banker to banks: maintains banking
accounts of all scheduled banks. Supervises and controls Banks and Financial
Institution. Regulates transactions in Foreign Exchange.
RBI – Banker to Government.
As per Sec 20 and 21 of the RBI
Act Reserve Bank of India is obliged to transact Banking business and manage
the public debts of the Central Government. As per Sec 21A RBI can perform
similar functions for State Government.
As per the provision of the
Public Debt Act 1944 and also Reserve Bank of India Act , RBI manages the
public Debt of Central and State Government. Public Debts can be by way of long
term bonds or by way of short term Treasury bills.
Treasury Bills.
Treasury bills represent short
term borrowings of Central Government. They are issued as Promissory Notes with
different maturities say 91 days 182 days and 364 days. Treasury bills are
issued by RBI by way of Auction basis. Treasury bills are Negotiable
instrument.
What is monetary policy?
A Monetary policy is the process
by which the government, central bank, of a country controls (i) the supply of
money, (ii) availability of money, and (iii) cost of money or rate of interest,
in order to attain a set of objectives oriented towards the growth and
stability of the economy. This has two objectives, To ensure price stability
and to make available adequate credit to the productive sectors of the economy.
This is achieved by regulating money supply in the market.
Money Supply.
Money supply in the economy is
represented by four types of monetary aggregates viz M0, M1, M2 and M3 .and
three types of liquidity aggregates viz L1 L2 and L3 These 7 types of
aggregates are computed by RBI as per the recommendations of Dr Y V Reddy
Committee.
The monetary aggregate capture
the data only with respect to Banking system. The Liquidity aggregate taking
into consideration the money supply due to Post Office deposits of Financial
Institutions and also Non Banking Financial Institution.
Monetary aggregate
Nature
|
Components
|
M0
|
Monetary base. This is computed
by RBI once in a week.
M0 = Currency in circulation +
Bankers deposits with RBI + other deposits with RBI.
|
M1
|
Narrow Money.
M1 = Currency with Public +
Demand Deposits with Banks + other deposits with RBI. Demand deposits with
Banking system includes Current Deposits and only demand liability portion of
Savings Bank,.
|
M2
|
It can be computed in the
following two ways
M2= M1 + Certificate of
Deposits issued by Banks + Term Deposits (Excluding FCNR (B) with the
contractual maturity up to 1 year with the Banking systems.)
Or M2 = Currency with Public+
current Deposit with Banking system.+ SB with Banking system. + Certificate
deposits issued by Banks+ Term Deposits with maturity up to 1 year. (FCNR (B)
excluded) .
|
M3
|
Broad Money.
M3 = M2 + Term Deposit
(Excluding FCNR (B) deposits) more than 1 year + call borrowing by Banking
system from non depository financial corporation.
|
Liquidity Aggregates.
|
|
L1
|
L1 = M3 + All deposits
(Excepting NSC’s), with post office Savings Bank.
|
L2
|
L 1 + Term Deposit /Term
Borrowings /Certificate of deposit issued by Term lending
institution/Refinancing institution.
|
L3
|
L2 + Public deposit of NBFCs
|
L1, L2 and L3 are compiled by RBI
once in a quarter.
What is Fiscal Policy?
Fiscal policy is the use of
government spending and revenue collection to influence the economy. These
policies affect tax rates, interest rates and government spending, in an effort
to control the economy. Fiscal policy is an additional method to determine
public revenue and public expenditure.
Credit Policy and Credit control.
General Credit Control.
General or quantitative Credit
control is exercised by changing 1) Bank rate 2) Reserve Requirements 3) Open
Market operations 4) Interest rate Policy. By regulating these RBI influences
the quantum of lendable resources of the commercial Banks and thereby the total
volume of credit which is an important source of money supply. This in turn
helps control inflation.
Bank rate.
This is the rate at which the
Central Bank of the country makes advances against approved securities.
Purchases or rediscounts eligible Bills of Exchange and other commercial paper
to provide financial accommodation to Banks or other specified group of
Institutions. Sec 49 of RBI act defines Bank rate as the standard rate at which
it is prepared to buy or discount bills of exchange or other commercial paper
eligible for purchase under this act. Bank rate affect both cost and the
availability of credit. The effectiveness of Bank rate as a credit control
measure is very limited in India, as Banks are now allowed to a great extent.
Freedom to change rate of interest as per their discretion.
Open Market operation.
The buying and selling of
securities or other assets like Foreign Exchange, gold by Central Bank with an
objective
Selective Credit control.
While general Credit control is
used to regulate the cost and total volume of Credit, the selective Credit
control also known as quantitative control is used to regulate cost and quantum
of credit in selective sectors. RBI is empowered to exercise selective Credit
control by virtue of section 21 and 35A of Banking Regulation Act. Selective
Credit control is exercised by stipulating 1) Minimum margin, for lending
against selected commodities. 2) Ceiling on the level of credit 3) Minimum
interest to be charged on advances against particular commodities.
What is NABARD?
NABARD was established by an act
of Parliament on 12 July 1982 to implement the National Bank for Agriculture
and Rural Development Act 1981. It replaced the Agricultural Credit Department
(ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of India, and
Agricultural Refinance and Development Corporation (ARDC). It is one of the
premiere agency to provide credit in rural areas. NABARD is set up as an apex
Development Bank with a mandate for facilitating credit flow for promotion and
development of agriculture, small-scale industries, cottage and village
industries, handicrafts and other rural crafts.
What are non-performing assets?
Non-performing assets, also
called non-performing loans, are loans, made by a bank or finance company, on
which repayments or interest payments are not being made on time. A debt
obligation where the borrower has not paid any previously agreed upon interest
and principal repayments to the designated lender for an extended period of
time. The nonperforming asset is therefore not yielding any income to the
lender in the form of principal and interest payments.
Latest CRR , SLR etc as per RBI latest Policy announcement.
As of 3 May 2013
Indicator
|
Current rate
|
Inflation
|
5.96%
|
Bank rate
|
8.25%
|
CRR
|
4.00%
|
SLR
|
23%
|
Repo rate
|
7.25%
|
Reverse repo rate
|
6.25%
|