Friday, September 4, 2015

CRR and SLR

Cash Reserve Ratio and Statutory Liquidity Ratio


Introduction
RBI has prescribed statutory returns, i.e. Form A Return (for CRR) under Section 42(2) of the RBI (RBI) Act, 1934 and Form VIII Return (for SLR) under Section 24 of the Banking Regulation Act, 1949 for monitoring the compliance of statutory reserve requirements by scheduled commercial banks(SCB).


CASH RESERVE RATIO

In terms of Section 42(1) of the RBI Act, 1934, RBI prescribes the CRR for SCBs without any floor or ceiling rate for securing the monetary stability in the country.

Maintenance of CRR
Presently CRR is prescribed at 4.00% of a bank's total of DTL.

Incremental CRR
In terms of Section 42(1A) of RBI Act, 1934, the SCBs are required to maintain, an additional average daily balance, which shall not be less than the rate specified by the RBI. At present no incremental CRR is required to be maintained by the banks.

Computation of DTL
The liabilities of a bank may be in the form of demand or time deposits or borrowings or other miscellaneous items of liabilities. These liabilities may be towards the banking system or towards others. Banks are advised to approach the RBI in case of any question as to whether any transaction would be regarded as reservable liability.

Demand Liabilities
Demand Liabilities of a bank are liabilities which are payable on demand. These include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees, balances in overdue fixed deposits, cash certificates and cumulative/recurring deposits, outstanding Telegraphic Transfers (TTs), Mail Transfers (MTs), Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand. Money at Call and Short Notice from outside the banking system should be shown against liability to others.

Time Liabilities
Time Liabilities of a bank are those which are payable otherwise than on demand. These include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit, if not payable on demand, deposits held as securities for advances which are not payable on demand and Gold deposits.

Other Demand and Time Liabilities (ODTL)
ODTL include interest accrued on deposits, bills payable, unpaid dividends, suspense account balances representing amounts due, net credit balances in the branch adjustment account, any amounts due to the banking system other than deposits or borrowing. If a bank cannot segregate the liabilities of the banking system, from the total of ODTL, the entire ODTL may be shown as 'Other Demand and Time Liabilities' and average CRR maintained on it.

Balance in a blocked account pertaining to segregated credit entries for more than 5 years in inter-branch adjustment account, the margin money on bills purchased / discounted and gold borrowed by banks from abroad, should also be included in ODTL.

Cash collaterals received under collateralized derivative transactions should be included in the bank’s DTL/NDTL for the purpose of reserve requirements. Interest accrued should be calculated for each reporting fortnight, so that the bank’s liability in this regard is fairly reflected in the total NDTL of the same fortnightly return.

Assets with the Banking System
Ø  Balances with banks and notified financial institutions in current and other accounts,
Ø  Loans or deposits repayable at call or short notice of a fortnight or less and
Ø  Loans other than money at call and short notice made available to the banking system.
Ø  Any other amounts which cannot be classified under any of the above items.

Borrowings from abroad by banks in India
Such borrowings will be considered as 'liabilities to others' and will be subject to reserve requirements. Upper Tier II instruments raised and maintained abroad shall be reckoned as liability for the computation of DTL for the purpose of reserve requirements.

Arrangements with Correspondent Banks for Remittance Facilities
When a bank accepts funds for remittance, it becomes a liability in its books. This liability will extinguish only when the correspondent bank honours the drafts issued by the accepting bank. Such liabilities should be reflected in the accepting bank's books as liability under the head 'Liability to others in India' and should be taken into account for computation of DTL for CRR/SLR purpose.

The amount received by correspondent banks will be shown as 'Liability to the Banking System' and not as 'Liability to others'. This liability could be netted off against the inter-bank assets.

Liabilities not to be included for DTL/NDTL computation
a)   Paid up capital, reserves, credit balance in the P&L Account, loan from RBI and refinance from Exim Bank, NHB, NABARD, SIDBI;
b)   Net income tax provision;
c)   Amount received from DICGC towards claims and held pending;
d)   Amount received from ECGC by invoking the guarantee;
e)   Claim received from insurance company pending judgement of the Court;
f) Amount received from the Court Receiver;
g)    Liabilities arising on account of utilization of limits under Bankers’ Acceptance Facility;
h)    DRDA subsidy of 10,000/- kept in Subsidy Reserve Fund account of Self Help Groups;
i) Subsidy released by NABARD under Investment Subsidy Scheme for Construction/Renovation/Expansion of Rural Godowns;
j)  Net unrealized gain/loss arising from derivatives transaction under trading portfolio;
k)   Income flows received in advance which are not refundable;
l)  Bill rediscounted by a bank with eligible financial institutions as approved by RBI;

Exempted Categories
i.      Liabilities as computed under clause (d) of explanation to Sec 42(1) of RBI Act,;
ii.    Credit balances in ACU (US$) Accounts; and
iii.  Demand and Time Liabilities in respect of their Offshore Banking Units (OBU).
iv.  Eligible amount of incremental FCNR (B) and NRE deposits of maturities of three years and above from the base date of July 26, 2013, and outstanding as on March 7, 2014, till their maturities/pre-mature withdrawals, and
v.   Minimum of Eligible Credit and outstanding Long term Bonds to finance Infrastructure Loans and affordable housing loans,

Loans out of FCNR (B) Deposits and Inter-Bank Foreign Currency (IBFC) Deposits
Such Loans should be included as part of bank credit while reporting in Form ’A’ Return. For the purpose of reporting, foreign currency in USD, GBP, JPY and Euro should be converted into INR at RBI Reference Rates. Other currencies should first be converted into USD at New York Closing Rate as on the day end of the Reporting Friday, and then use RBI Reference Rate for the same day to convert it into INR.

Procedure for Computation of CRR
A lag of one fortnight in the maintenance of stipulated CRR was introduced with effect from 6/11/99.

Maintenance of CRR on Daily Basis
All SCBs are required to maintain minimum CRR up to 95 % of the average daily required reserves on all days of the fortnight with effect from September 21, 2013.

No Interest Payment on Eligible Cash Balances maintained by SCBs with RBI under CRR
RBI does not pay any interest on the CRR balances with effect from March 31, 2007.

Fortnightly Return in Form A (CRR)
Under Section 42(2) of the RBI Act, 1934, all SCBs must submit a provisional Return in Form 'A' within 7 days and the Final return within 20 days from the expiry of the relevant fortnight. With effect from October 9, 1998, SCBs in India are required to submit a Memorandum to Form 'A' Return giving details about paid-up capital, reserves, time deposits comprising short-term (one year or less) and long-term (more than one year), certificates of deposits, NDTL, total CRR requirement, etc.

A return showing all foreign currency assets and liabilities and Annexure B to Form ‘A’ Return giving details about investment in approved securities, investment in non-approved securities, memo items such as subscription to shares /debentures / bonds in the primary market and subscriptions through private placement.

The average of the minimum balances maintained in each month during the half year shall be treated as the amount representing the "time liability” portion of the savings bank deposits. The difference of this amount and the average of the actual balances would represent the "demand liability”
DL and TL so obtained shall be applied for all reporting fortnights during the next half year.

Penalties
Penal interest is charged as under in cases of default in maintenance of CRR by SCBs:
(i)    In case of default in maintenance of CRR on daily basis, penal interest will be recovered at 3% per annum over Bank Rate on the amount falling short on that day. If the shortfall continues on the next succeeding days, penal interest will be recovered at 5% per annum over Bank Rate.

(ii) In cases of default in maintenance of CRR on average basis during a fortnight, penal interest will be recovered as envisaged in sub-section (3) of Section 42 of RBI Act, 1934.

SCBs should furnish the date, amount, percentage, reason for default and also action taken to avoid recurrence of such default.


Statutory Liquidity Ratio (SLR)

As per Section 24 of the Banking Regulation Act, 1949, RBI can prescribe the SLR for SCBs in specified assets, the value of which shall not be less than 40 % of its total DTL in India as on the last Friday of the second preceding fortnight.

SCBs can participate in the Marginal Standing Facility Scheme of RBI, wherein the eligible entities may borrow up to 2% of their NDTL outstanding at the end of the second preceding fortnight. Additionally, the eligible entities may also continue to access overnight funds under this facility against their excess SLR holdings. In the event, the banks’ SLR holding falls below the statutory requirement up to two % of their NDTL, banks will not have the obligation to seek a specific waiver for default in SLR compliance arising out of use of this facility.

Within the SLR requirement, Government securities can be reckoned as Level 1 High Quality Liquid Assets (HQLAs) for the purpose of computing Liquidity Coverage Ratio (LCR) of banks. In addition to this, banks can reckon up to another 5 % of their NDTL within the SLR requirement as level 1 HQLA.

SCB shall maintain assets valued not less than 21.5 % of the total NDTL as on the last Friday of the second preceding fortnight. Such assets will include:

(a)  Cash  or 
(b)  in  Gold  valued  at  a  price  not  exceeding  the  current  market  price,  or
(c) Investment in the following instruments, referred to as "SLR securities":

(i)                 Dated securities issued up to May 06, 2011;
(ii)               Treasury Bills of the Government of India;
(iii)             Dated securities of the Government of India issued under the market borrowing programme and the Market Stabilization Scheme;
(iv)             State Development Loans (SDLs) of the State Governments issued under the market borrowing programme; and
(v)               Any other instrument as may be notified by the RBI.

Such securities, if acquired under LAF, shall not be treated as an eligible asset for this purpose.

Explanation:
1.   "Market borrowing programme" shall mean the rupee loans raised by the Government of India and the State Governments from the public and managed by the RBI through the issue of marketable securities, through an auction or any other method.

2.     Encumbered SLR securities shall not be included for the purpose except:
(i)     Securities lodged with another institution for an advance, against which no amount has been drawn so far; and,
(ii)   Securities offered as collateral to the RBI for availing liquidity assistance from Marginal Standing Facility up to 2% of NDTL in India carved out of the required SLR portfolio.

3.   The following shall be deemed to be cash maintained in India:
(i)  The deposit required to be made with RBI under Sec 11(2) of the BR Act, 1949 by a banking company incorporated outside India;
(ii)  Any balance maintained with RBI in excess of the balance required to be maintained under CRR;
(iii) Net balance in current accounts with other SCBs in India.


Note:
  1. It has been decided that:
(i)     The SLR status of securities issued by the Government of India and the State Governments will be indicated in the Press Release by RBI at the time of issuing such securities; and,
(ii)      An updated and current list of the SLR securities will be posted on the RBI's website  (www.rbi.org.in) under the link "Database on Indian Economy”

2.      The cash management bill will be treated as Government of India Treasury Bill and shall be treated as SLR security.


Procedure for Computation of SLR
The procedure to compute total NDTL for the purpose of SLR is broadly similar to the procedure followed for CRR. Banks should include inter-bank term deposits / term borrowing liabilities of all maturities in 'Liabilities to the Banking System'. Similarly, banks should include their inter-bank assets of term deposits and term lending of all maturities in 'Assets with the Banking System' for computation of NDTL for SLR purpose.

Classification and Valuation of Approved Securities for SLR
Banks may be guided by the instructions contained in our Master Circular on Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by banks.

Penalties
In case of default, Banks will be liable to pay penal interest at 3% per annum over Bank Rate on the shortfall for that day and if the default continues, the penal interest may be increased to 5% per annum over Bank Rate for the concerned days of default.

Return in Form VIII (SLR)
i) Banks should submit a Return in Form VIII showing the amounts of SLR held on alternate Fridays during immediate preceding month with particulars of their DTL in India, to RBI before 20th of every month,.

ii) Banks should also submit a statement as Annexure to Form VIII Return giving daily position of (a) assets held for the purpose of compliance with SLR, (b) excess cash balances maintained with RBI, and (c) mode of valuation of securities.

Correctness of computation of DTL to be certified by Statutory Auditors
The Statutory Auditors should verify and certify that all items of outside liabilities had been duly compiled by the bank and correctly reflected under DTL/NDTL in the fortnightly/monthly statutory returns submitted to RBI for the financial year.

Based on the Master Circular of 1/7/15.
Please visit www.rbi.org.in  for any further clarification if required…………….. Poppy