Financial Terms

Indian banks are required to hold a certain proportion of their deposits as cash. In reality they don’t hold these as cash with themselves, but with Reserve Bank of India (RBI), which is as good as holding cash. This ratio (what part of the total deposits is to be held as cash) is stipulated by the RBI and is known as the CRR, the cash reserve ratio. When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 10, banks will hold Rs10 with the RBI and lend Rs 90. The higher this ratio, the lower is the amount that banks can lend out. This makes the CRR an instrument in the hands of a central bank through which it can control the amount by which banks lend. The RBI’s medium term policy is to take the CRR rate down to 3 per cent

the hike in CRR from 4.5 to 5 per cent will increase the amount that banks have to hold with RBI. It will therefore reduce the amount that they can lend out. The move is expected to shift Rs 8,000 crore of lend able resources to RBI. In the past few months the money that banks has available for giving out as credit is greater than the amount they have been lending out. This has led to “an overhang of liquidity” in the system. The objective of the CRR hike is to “mop up” some of the “excess liquidity” in the system

the hike in CRR is not likely to lead to an immediate increase in interest rates. There is excess liquidity in the system even after a higher amount is deposited with RBI as reserves.

Unless the demand for credit picks up to the extent that the money is all lent out, banks will not have an incentive to raise interest rates.

The inflation rate may continue to be high, the economy may also continue to witness growth which will keep the demand for credit high, and international trends are for rates to move up. This means that sooner or later interest rates will go up. The first rates to get impacted are yields on government bonds. We have already seen this happening. If the inflation rate keeps rising, RBI may raise the ‘Repo rate’, the short term rate at which banks park excess funds with the RBI. This makes it less attractive for banks to lend.

Further, RBI may raise the bank rate, the rate at which it lends to banks.

At this point you may expect interest rates on home loans and fixed deposits to go up as well. Over a year rates could go up by as much as 3 per cent


but I expect SLR is for a liquid ratio.

Liquid ratio = Liquid Asset/Current Liabilities
Liquid Asset = Current Asset-Stock

Current Asset Ratio (CAR)

Current asset/ Current Liabilities
Current asset is the asset which is easily liquefied with in a span of maximum 1 year.

Current liabilities are the liability which has to be played in with in 1 year.

 

SLR is statutory liquid ratio, this is the % of deposits that need to be maintained as liquid thru' investing in RBI bonds. SLR includes CRR, for example CRR is 7% and SLR is 10%, the 3% should be can non-cash investments.

SDR: The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries

PLR: Prime lending rate is the rate that the bank will lend to its best customers. Floating rate loans will be quoted as some thing like PLR+_ 1%, when RBI changes SLR, CRR etc banks will announce change in PLR and other loans interest will be changed accordingly

CAR: Capital Adequacy ratio is the amount of capital that shareholders should put in for each 100 deposits with bank. For ex if CAR is 12.5% and a bank has a deposit base of 100, then Bank's share capital reserves and surplus should be at least 12.5

                                           

Repo (Repurchase) Rate

Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demands they are facing for money (loans) and how much they have on hand to lend.

If the RBI wants to make it more expensive for the banks to borrow money, it increases the Repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the Repo rate.

Reverse Repo Rate

This is the exact opposite of Repo rate.

The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse Repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system

If the reverse Repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain amount of risk)

Consequently, banks would have lesser funds to lend to their customers. This helps stem the flow of excess money into the economy

Reverse Repo rate signifies the rate at which the central bank absorbs liquidity from the banks, while Repo signifies the rate at which liquidity is injected.

Bank Rate

This is the rate at which RBI lends money to other banks (or financial institutions.

The bank rate signals the central bank’s long-term outlook on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and vice-versa.

Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If the RBI hikes the bank rate (this is currently 6 per cent), the interest that a bank pays for borrowing money (banks borrow money either from each other or from the RBI) increases. It, in turn, hikes its own lending rates to ensure it continues to make a profit.

Call Rate

Call rate is the interest rate paid by the banks for lending and borrowing for daily fund requirement. Since banks need funds on a daily basis, they lend to and borrow from other banks according to their daily or short-term requirements on a regular basis.

CRR

Also called the cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money

SLR

Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements. What SLR does is again restrict the bank’s leverage in pumping more money into the economy.

Regarding Repo and Bank Rate:
Repo is short term whereas Bank rate is long term. Thus Repo rates are also called short term lending rate and Bank rates are called long term lending rates. Now if the Repo rate > Bank rate, it signifies that short term borrowing of funds is more expensive for commercial banks. Incidentally, this short term borrowing through Repo is required by the banks to maintain its CRR. Thus if Repo rate is increased, bank will reduce its lending to public because to maintain the CRR bank will have to now borrow from RBI at a higher Repo rate. Thus increase of Repo is done to suck liquidity from the economy.

CRR-Is the percentage of amount deducted from the total liability of the bank and which should be kept in the liquid form with the bank(say total liability of bank is 100 and amount for CRR is fixed 5%,than Rs. 5 will be kept in the liquid form ),remaining amount will be Rs.95-/

SLR- it is the percentage (fixed by the RBI) of money (left after deduction of CRR) which is invested in the government securities. (Say the Percentage fixed for the SLR is 25% than 25%of95 will be invested as the SLR

PLR .Is the percentage of amount left after deduction of CRR and SLR from the total liability of any bank, and lend to the Sectors at lower rate of interest as compare to another lending.

RR-Lending rate offered by the RBI to other banks for short term lending against the private securities.

RRR- It is the opposite of RR (means rate at which RBI offers the securities to the banks)

BR- It is the rate at which the RBI lends the loan to other banks for long term against government securities.

RR-Lending rate offered by the RBI to other banks for short term lending against the private securities.