LIQUIDITY MANAGEMENT

Cash Reserve Ratio (CRR):

• It refers to the cash which banks have to
maintain with the RBI, as a percentage of
their demand and time liabilities.
• As per section 42 of RBI Act ,1934
• At least 3% of NDTL
• RBI empowered to Enhance CRR
• Objective is to ensure liquidity and
solvency of Banks
Cash Reserve Ratio (CRR)….
NDTL :
Demand Liabilities :
Current deposit , Demand Liabilities ,
Credit Balance in CC Accounts , Deposit
held as security payable on demand for
advance
Time Liabilities : Fixed Deposit , Cash
Certificate ,RD Certificate etc
 Please Note …….
• CRR up to 3% Earn No Interest .
• Only 2% of the current level of CRR OF
5% will be paid interest by the RBI .
• Interest on CRR is paid at 3.5% P.A. every
month .
• Also CRR in excess of the mandatory
earns no interest but will be counted
towards the SLR in case there is an SLR
shortfall..
• Every reporting Fortnight starts on a
Satuarday ,or ,if it is a holiday ,the next
working day and ends on the following
second Friday (Thursday or the previous
working if Friday is a holiday ) .

• NDTL returns are due to the RBI in seven

days of the close of a reporting fortnight ,
final returns in 21 days
• Data sent in Form A to CRR /SLR cell .
 Exempted Categories of CRR
• Following liability categories are exempted
from CRR requirements---

• Transactions in CBLO(Collateralized Borrowing And

Lending Obligation) with Clearing corporation of

India(CCIL)
• Demand and time liabilities in offshore
Banking Units
 Cost of CRR Maintenance…
• There is an Opportunity Cost in Maintaining
CRR
• Assume Nominal cost of a deposit of Rs 100
to be 8% .so Cost of Rs 100 is Rs 8
• Let CRR be 4.50 %
• CRR amount will be Rs 4.50
• CRR obove 3% and upto 5 % will earn
Interest by RBI
• Rs 1.50 (4.50-3.00) will be entitled to earn
 Cost of CRR Maintenance
• So Rs 1.50 @ 6 % will be entitled for the
interest of Rs 0.09 .

• The Actual Liquidity with Bank after CRR

is Rs 95.50 (Rs 100-4.50)
• Actual Interst paid by bank /Cost of
Deposit to Bank for Rs 100 is Rs 7.91 (8-
0.09)
• We can say that now Bank has liquidity of
Rs 95.50 at cost of intrest paid of Rs 7.91

• Effective cost of deposit / Intrest paid by

the Bank is = Rs 7.91/Rs 95.50
=8.28 %
It means Bank is Paying Interest of Rs 8.28
% not 8.00 % to get deposit of Rs 100 .
 Penalties for CRR shortfall
• For a shortfall in the minimum daily
balance of 70% ,no CRR interest is paid
for that fortnight .
If there is a CRR Short fall :
• The Bank pays the Bank Rate + 3% on
the shortfall in the first fortnight .
• This increases the Bank Rate + 5% from
the second fortnight .
Statutory Liquidity Ratio (SLR): It is
reserve the bank has to maintain with the
RBI for a period ( daily basis) in order to
restrict credit and ensure solvency.
Cash + Bal in current account +
Gold and unencumbered approved
securities
SLR = --------------------------------------------
Demand + Time liability
 SLR …..
SLR to be maintained at the close of the
business on any day ,not less than 25 %
of the of total of demand and time liabiliies
.
It can be enhance upto 40 % .
All banks have to maintain certain portion of
their deposit as SLR HAVE TO INVEST
THAT AMOUNT IN G Securities .
 Components of SLR
• Cash
• Gold valued at current market price
• SLR Securities---
(a)State Development Loans of State Govt
(b) Dated Securities of Govt of India issued
from time to time under market borrowing
programmeand market stabilisation
scheme
© Treasury Bills of Govt of India
 Cost of SLR Maintenance
• Assume Deposit taken by Bank is Rs100
• SLR to be Maintained is Rs 25 (25 % of
Rs 100)
• Liquidity in the hand of Bank is Rs 75
• Suppose the Current Yield on SLR Bonds
is 8 %
• Cost of Deposit /Interest Paid By Bank is
9%.
• So Loss is 1% (of Rs 25) which is equal to
Rs 0.25
 Cost of SLR Maintenance
• So effective cost of Deposit (Interest paid
by Bank 9.25 %) is =Rs 9.25

• Non SLR Portfolio in the hand of Bank is

Rs 75 .
• To cover the cost of Deposit of Rs 100,the
remaining NON-SLR portfolio should earn
the Interest of 12.33% (Rs 9.25/75 ) .
 What would be the cost of
Capital for Bank …….
• In other words ,what is the effective rate of
interest being paid by Bank

• Average cost of Capital =

(100/70.50*8% +100/25*12.33% +100/4.50*8.25)
=(0.705*8% +0.25*12.33%+0.045*8.25%)
=(5.64+3.0825+0.37125)%
=9.093%
 Please Note ……
• SLR had reached a very high level of
38.50% during 1991-92
 CRR & SLR PROVISION (At Glance)
CRR SLR

Legal Provision Section 42(1) RBI Act Section 24(2-a) Banking

1934 Regulation Act 1949
Min & Max RBI direction –Max 15% Min RBI Direction –Max 40%

Kept as Cash Balance with RBI Cash in Hand ,Gold and

Investment in approved Securities
Basis As % of NDTL at As % of NDTL.On Daily Basis on
fortnightly average Basis DTL on the last Friday of 2nd
Preceding fortnight.

Interest No Interest Payable wef As per investment made in

March 31 2007 different securities.
Penality Penal interest for the day Penal interest for the day on which
on which not maintained not maintained at BR+3%pa
at BR+3%pa For next day BR +5%
For next day BR +5%