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P3 Financial Terms

This document defines several key financial terms: - Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are the required reserve ratios for banks' deposits that must be kept with the RBI. - Repo rate is the interest rate at which RBI lends to banks. Reverse repo rate is the rate at which RBI borrows from banks. Bank rate is the interest rate at which RBI purchases bills/papers from banks. - Marginal Standing Facility (MSF) rate allows banks to borrow overnight from RBI in emergency liquidity situations, and is generally 0.25% above the repo rate.

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62 views

P3 Financial Terms

This document defines several key financial terms: - Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are the required reserve ratios for banks' deposits that must be kept with the RBI. - Repo rate is the interest rate at which RBI lends to banks. Reverse repo rate is the rate at which RBI borrows from banks. Bank rate is the interest rate at which RBI purchases bills/papers from banks. - Marginal Standing Facility (MSF) rate allows banks to borrow overnight from RBI in emergency liquidity situations, and is generally 0.25% above the repo rate.

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akshita rao
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Financial terms

4.5%

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Cash Reserve Ratio (CRR)
• It is the percentage of deposits that a bank has to keep as reserves with
the RBI. When the Government increases CRR, the bank has to keep a
larger percentage of its deposits as reserves. It has lesser funds available
to lend. Its capacity to lend decreases. Hence, the money supply also
decreases. (CRR ↑ ⇒ money supply ↓).
18%

Rs 720
Rs 180
Rs 1000
• Statutory Liquidity Ratio
• It is the percentage of deposits that a bank has to invest in risk-free assets
such as cash, gold, or Government securities. When the Government
increases SLR, the bank has to keep a larger percentage of its deposits in
cash, gold, and Government securities. It has a lesser amount to lend to
consumers and businesses. Hence, the money supply decreases. (SLR ↑
⇒ money supply ↓). The current SLR is 18 %.
RBI Repo Rate as on August 5, 2022

SLR 18.00%
CRR 4.50%
Repo Rate 5.40%
Bank Rate 5.65%
Reverse Repo Rate 3.35%
Marginal Standing Facility Rate 5.65%
Concepts

Repo rate
When RBI wants to
• Repo rate is the rate at which a bank borrows from the RBI against the make borrowing of
collateral of Government securities. funds expensive for the
• To illustrate, if a bank wants to borrow money from RBI, it sells banks, it increases the
government securities to the RBI. The bank makes an agreement with the
RBI to repurchase these securities later at a predetermined rate. The
interest rate charged on such borrowings is the Repo rate.
repo rate and
Reverse repo rate
contrarily, when it
• Reverse repo is the rate at which banks keep their excess funds with the RBI wants to provide
against the collateral of Government securities on an overnight basis. If the
reverse-repo rate increases, banks find it more profitable to keep its funds
money at a cheaper
with RBI. Hence, lending activities decline (Reverse repo rate ↑ ⇒ money rate, it decreases the
supply ↓).
• It is the reverse of repo rate, i.e., this is the rate RBI pays to banks in order
repo rate.
to keep additional funds in RBI
Bank rate
• Bank rate is the rate at which RBI lends funds to the commercial banks.
Unlike the repo rate, there is no repurchase agreement in the Bank rate.
It is also the rate at which the RBI purchases (rediscounts) bills of
exchange or commercial papers from the banks. If this rate increases, it
becomes expensive to borrow from the RBI. Therefore, banks increase
their lending rates. Hence, lending activities decline. (Bank rate ↑ ⇒
money supply ↓)
• MSF or Marginal Standing Facility enables banks to borrow funds from RBI (Reserve
Bank of India) in emergency situations when their liquidity absolutely dries up.
• This short-term borrowing scheme facilitates the scheduled banks to get funds from
the central bank of India overnight in case of serious cash shortage by offering their
approved government securities.
• Liquidity shortfalls are often faced by banks resulted from the financial gap created
due to deposit and loan portfolio mismatch. Such shortfalls don't last long and to
manage such emergency conditions banks can approach RBI for quick money for a
period of one day within the limits of the Statutory Liquidity Ratio (SLR).
• Generally, the MSF rate is 0.25% or 25 basis points more than the repo rate.
• NDTL or Net Demand and Time Deposit
Liabilities Time liabilities are the total liabilities of
a bank towards its customers. It comprises of
two different components- Deposit Liabilities
and Time Liabilities.
• Time liabilities are the liabilities that the bank has
to pay after a pre-decided period of time.

NDTL • For example: If you have a fixed deposit for one


year with a bank then the bank has a one-year
time liability towards you as after one year the
bank has to return your money back with
interest.
• Contrarily, deposit liabilities are the liabilities that
the bank are accountable to pay on demand of
the customer.

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