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BFM MODULE - C
CHAPTER 18: FUNDING AND REGULATORY ASPECTS
(PART-II)
What we will study?
*What are the components of NDTL?
NDTL : Net Demand Time Liability
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Main components of DTL are:
*Demand deposits (held in current and savings accounts,
margin money for LCs, overdue fixed deposits etc.).
*Time deposits (in fixed deposits, recurring deposits,
reinvestment deposits etc.).
*Overseas borrowings.
*Foreign outward remittances in transit (FC liabilities
net of FC assets).
*Other demand and time liabilities (accrued interest,
credit balances in suspense account etc.).
Scheduled Commercial Banks are exempted from
maintaining CRR on the following liabilities:
*Liabilities to the banking system in India as computed
under clause (d) of Section 42(1) of the RBI Act, 1934.
[CRR]
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*Credit balances in ACU (US$) Accounts. [CRR]
ACU: Asian Clearing Union
*Demand and Time Liabilities in respect of their
Offshore Banking Units (OBUs). [CRR]
*Minimum of Eligible Credit (EC) and outstanding long-
term Bonds (LB) to finance Infrastructure Loans and
affordable housing loans. [CRR & SLR]
*Liabilities in respect of the bank’s International
Financial Services Centre (IFSC) Banking Units (IBUs).
[CRR & SLR]
*Funds Borrowed under market repo against
Government securities. [CRR & SLR]
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The following liabilities are NOT to be included for NDTL
stipulation (or CRR or SLR stipulation):
*Paid-up capital, reserves, retained profits, refinance
availed from RBI, and apex financial institutions like
NABARD and SIDBI.
*Net income tax provision.
*Claims received from DICGC, ECGC, Insurance
Company ,Court Receiver etc.
*Liabilities arising on account of utilization of limits
under Bankers' Acceptance Facility (BAF).
*District Rural Development Agency (DRDA) subsidy
kept in Subsidy Reserve Fund account in the name of
Self-Help Groups.
*Subsidy released by NABARD under Investment
Subsidy Scheme for Construction/Renovation/
Expansion of Rural Godowns.
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*Net unrealized gain/loss arising from derivatives
transaction under trading portfolio.
*Income flows received in advance such as annual fees
and other charges which are not refundable.
*Subsidy released by Central/ State Government which
is kept in zero per cent fixed deposit account.
*Bill rediscounted by a bank with eligible financial
institutions as approved by RBI.
What is Bankers' Acceptance Facility (BAF)?
Banker's acceptance Facility (BAF) is a negotiable piece
of paper that functions like a post-dated check. A bank,
rather than an account holder, guarantees the payment.
Banker's acceptances (also known as bills of exchange)
are used by companies as a relatively safe form of
payment for large transactions.
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What is a Bill Rediscounting?
A rediscount occurs when a short-term negotiable debt
instrument is discounted for a second time.
Time Line for CRR:
The CRR is to be calculated on the basis of DTL, with a
lag of one fortnight, i.e., on the reporting Friday, the
DTL as at the end of previous fortnight will form the
basis for CRR calculation.
This is to allow banks enough time to collect relevant
information from the branches.
Banks have to maintain cash balances with RBI to meet
the prescribed CRR on average during the fortnight,
subject to daily cash balances not falling below 90% of
the amount required for CRR.
This will allow some flexibility to the banks for
mobilizing cash resources.
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RBI does not pay interest on deposits held by banks to
meet the CRR, even if the deposits are in excess of
minimum required by RBI.
CRR, therefore, effectively increase cost of deposits to
the banking sector.
SLR:
The SLR requirement is to be computed similarly, as of
the last Friday of the second preceding fortnight.
The procedure to compute total NDTL for the purpose
of SLR is broadly similar to the procedure followed for
CRR.
The liabilities excluded from CRR stipulation do not
form part of liabilities for the purpose of SLR also.
However, the exemption for the purpose of CRR
available to the Scheduled Commercial Banks in case of
liabilities to the banking system in India, credit balances
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in ACU (US$) Accounts; and demand and time liabilities
in respect of their Offshore Banking Units (OBU) is not
applicable for the purpose of computation of SLR.
The SLR is to be maintained in the form of the following
assets:
*Cash balances (excluding balances maintained for CRR).
*Gold (valued at price not exceeding current market
price).
*Approved securities valued as per norms prescribed by
RBI.
Approved securities include:
*Dated securities of the Government of India issued
from time to time
*Treasury Bills of the Government of India
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*State Development Loans (SDLs) of the State
Governments.
*Any other instrument as may be notified by the RBI
General Guideline on CRR & SLR:
RBI may, from time to time, change the components of
DTL for calculation of CRR and SLR, as also securities
permitted under the approved category.
Any default in maintaining CRR and SLR will, apart from
attracting heavy penalties from RBI, affect reputation of
the bank, hence banks are extremely cautious in
complying with the reserve requirement.
As stated earlier, the CRR and SLR are the principal tools
available to RBI for liquidity management.
An increase in the reserve ratios will reduce money
supply (excess liquidity) and reduction in the reserve
ratios will increase the money supply.
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For instance, 0.5% reduction in CRR requirement
currently results in a cash inflow of approx. Rs. 50000-
55000 crore into the money market, and the additional
resources will flow into bank credit or investment in
debt/equity securities.
The money supply, in turn, influences the interest rates
and the exchange rate of Rupee.
The monetary policy of RBI is dictated by the need for
maintaining price stability (control inflation) and
stability of financial markets (control wild fluctuations
in interest rates and exchange rates).
Current CRR & SLR:
CRR : 4.50%
SLR : 18%
In September 2022 (keep changing so refer RBI website
for latest rate)
