RATIOS AND RATES OF BANKING SECTOR
RBI has the power to maintain the monetary stability. It being the market regulator, decides
the rates every quarter and it may and may not change them.
1. Bank rate-
- The bank rate is the rate of interest which is charged by a central bank while lending
loans to a commercial bank. In the event of a fund deficiency, a bank can borrow
money from the central bank of a country. In India’s case that would be the Reserve
Bank of India. The borrowing is done as per the basis of the monetary policy of that
country.
- The interest rate is charged by a nation’s central financial authority that controls the
money supply in the economy as well as the banking sector. This is usually done
quarterly to stabilize inflation and control the country’s exchange rates. As of March
2021, the Bank Rate is 4.25%
2. Cash Reserve Ratio-
- Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of
customers, which commercial banks have to hold as reserves either in cash or as
deposits with the central bank (liquid cash). CRR is set according to the guidelines
of the central bank of a country.
- The amount specified as the CRR is held in cash and cash equivalents, is stored in
bank vaults or parked with the Reserve Bank of India. The aim here is to ensure that
banks do not run out of cash to meet the payment demands of their depositors. CRR
is a crucial monetary policy tool and is used for controlling money supply in an
economy.
- CRR specifications give greater control to the central bank over money supply.
Commercial banks have to hold only some specified part of the total deposits as
reserves. This is called fractional reserve banking.
- 4th May 2022 – Reserve Bank of India (RBI) raised cash reserve ratio (CRR) by 50
basis points to 4.50% effective May 21.
- How does CRR work?
When the RBI decides to increase the Cash Reserve Ratio, the amount of
money that is available with the banks reduces. This is the RBI’s way of
controlling the excess flow of money in the economy. The cash balance that
is to be maintained by scheduled banks with the RBI should not be less than
4% of the total NDTL, which is the Net Demand and Time Liabilities. This
is done on a fortnightly basis.
NDTL refers to the total demand and time liabilities (deposits) that are held
by the banks. It includes deposits of the general public and the balances held
by the bank with other banks. Demand deposits consist of all liabilities
which the bank needs to pay on demand like current deposits, demand drafts,
balances in overdue fixed deposits and demand liabilities portion of savings
bank deposits.
Time deposits consist of deposits that need to be repaid on maturity and
where the depositor can’t withdraw money immediately. Instead, he is
required to wait for a certain time period to gain access to the funds. This
includes fixed deposits, time liabilities portion of savings bank deposits and
staff security deposits.
