Net Demand and Time Liabilities:
Demand Liabilities:
Liabilities of a bank which are payable on demand like saving accounts, demand draft.
Time Liabilities:
Time Liabilities of a bank are those which are payable otherwise than on demand like Fixed deposits.
Other Demand and Time Liabilities (ODTL):
It includes interest accrued on deposits, bills payable, unpaid dividends, suspense account.
The Net Demand and Time Liabilities or NDTL shows the difference between the sum of demand and time liabilities (deposits) with a bank and the deposits of bank in the form of assets held by the other bank.
Bank’s NDTL = Demand and time liabilities (deposits) +ODTL – deposits with other banks
Example:
Total demand and time liabilities of a bank X (including the other bank deposit) :10,000.
Interbank deposits of the bank X: 1000 with the other bank
NDTL: 9,000 (10,000-1,000).
Variable Reserve Ratios (VRR):
Monetary policy tool which controls money supply by maintaining different types of assets like cash , gold , government securities as reserves. Ex: Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
VRR is used to control credit in the market. By changing the ratio of reserves, the RBI influences the volume of credit that banks can advance. There are two components of VRR:
- Cash reserve ratio (CRR) and
- Statutory liquidity ratio (SLR).
Cash Reserve Ratio (CRR):-
- The average daily balance that a bank is required to maintain with the Reserve Bank of India to operate risk free.
- CRR is calculated on fortnightly basis and is calculated in terms of percentage of NDTL, notified by RBI from time to time .
- As per the RBI Act 1934, all Scheduled Commercial Banks are required to maintain a cash balance on average with the RBI on a fortnightly basis to cater to the CRR requirement.
DYNAMICS OF CRR:
The main purpose of CRR is to regulate money circulation in the economy to drive overall liquidity. It enables banks to keep a minimum cash reserve with RBI, so as to deal with any emergency situation. It helps keep inflation under control as the RBI use it as a tool to regulate liquidity in the economy.As on Nov 2024, CRR is 4.5 %.
If CRR increases, Liquidity with banks decreases, leading to less inflation in the market.
If CRR decreases, Liquidity with banks increases, leading to high liquidity in the market
****** The CRR limits were in the range of 3 -20 % prior to 2006 but 2006 onwards, the limits has been removed.
Statutory Liquidity Ratio (SLR):
The share of NDTL that all Scheduled Commercial Banks is required to maintain in safe and liquid assets, such as, government securities, cash and gold. The SLR is to be maintained with the bank itself.
DYNAMICS OF SLR :
- Changes in SLR often influence the availability of resources in the banking system for lending to the private sector and hence affect the liquidity in the economy.
- SLR has helped the government to sell its securities or debt instruments to banks.
- Most of the banks will be keeping their SLR in the form of government securities as it will earn them an interest income.
- Traditionally the amount to be held thus was stipulated to be no lower than 25 percent and not exceeding 40 percent of the bank’s total NDTL. SLR was 38.5 % during 1990’s while CRR was 15 % during 1990’s.
If SLR increases, Liquidity with banks decreases , leading to less inflation in the market.
If SLR decreases, Liquidity with banks increases, leading to high liquidity in the market .
**********From January-2007 the floor of 25 percent on the SLR was removed following an amendment of the Banking Regulation Act, 1949.
VRRR Rationale:
- CRR causes a huge strain on the financial resources of a bank as there is a huge opportunity cost as the money set aside for deposits with the RBI can be utilized by other sectors creating growth in the economy. Emerging economy like India cant afford to keep this money lying idle with RBI.
- The RBI does not pay any interest on the cash reserve it holds and it is a major lost opportunity for the Banks.
- Statutory Liquidity Ratio (SLR) is already in place and an instrument for the RBI to contain speculative spending by banks, indiscriminate lending and excess cash.
- CRR in addition to SLR is like taxing the bank for public deposits it has secured by sound banking practices. Additionally the CRR as a policy tool to control inflation in the economy has not also yielded the desired results. Price rise has always been an economic issue and will continue to be a cause of concern. Cash supply in the economy is not the sole cause of price rise but supply side factors are a major contributing factor.
- On the positive side, CRR along with SLR provide a buffer to banks so as to avoid aggression in providing loan and avoid any situation which is disastrous for a bank like bank run. Banks in India could survive crisis of 2008 due to VRR.
