Wednesday, October 15, 2008

What is bank rate, CRR, SLR, CAR, PLR, SDR ?

Indian banks are required to hold a certain proportion of their deposits as cash. In reality they don’t hold these as cash with themselves, but with Reserve Bank of India (RBI), which is as good as holding cash. This ratio (what part of the total deposits is to be held as cash) is stipulated by the RBI and is known as the CRR, the cash reserve ratio. When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 10, banks will hold Rs10 with the RBI and lend Rs 90. The higher this ratio, the lower is the amount that banks can lend out. This makes the CRR an instrument in the hands of a central bank through which it can control the amount by which banks lend. The RBI’s medium term policy is to take the CRR rate down to 3 per centThe hike in CRR from 4.5 to 5 per cent will increase the amount that banks have to hold with RBI. It will therefore reduce the amount that they can lend out. The move is expected to shift Rs 8,000 crore of lendable resources to RBI. In the past few months the money that banks have available for giving out as credit is greater than the amount they have been lending out. This has led to “an overhang of liquidity” in the system. The objective of the CRR hike is to “mop up” some of the “excess liquidity” in the systemThe hike in CRR is not likely to lead to an immediate increase in interest rates. There is excess liquidity in the system even after a higher amount is deposited with RBI as reserves. Unless the demand for credit picks up to the extent that the money is all lent out, banks will not have an incentive to raise interest rates. The inflation rate may continue to be high, the economy may also continue to witness growth which will keep the demand for credit high, and international trends are for rates to move up. This means that sooner or later interest rates will go up. The first rates to get impacted are yields on government bonds. We have already seen this happening. If the inflation rate keeps rising, RBI may raise the ‘repo rate’, the short term rate at which banks park excess funds with the RBI. This makes it less attractive for banks to lend. Further, RBI may raise the bank rate, the rate at which it lends to banks. At this point you may expect interest rates on home loans and fixed deposits to go up as well. Over a year rates could go up by as much as 3 per centI dont know about the SLR CAR PLR AND SDRBut I expect SLR is for a liquid ratio.
Liquid ratio = Liquid Asset/Current Liablities
Liquid Asset = Current Asset-Stock
Current Asset Ratio(CAR)
Current asset/ Current Liablities
Current asset is the asset which is easily liquified with in a span of maximum 1 year.Current liablities is the liablity which has to be payed in with in 1 year.
SLR: SLR is statutory liquid ratio, this is the % of deposits that need to be maintained as liquid thru' investing in RBI bonds. SLR includes CRR, for example CRR is 7% and SLR is 10%, the 3% should be can non-cash investments.
SDR: The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries
PLR: Prime lending rate is the rate that the bank will lend to its best customers. Floating rate loans will be quoted as some thing like PLR+_ 1%, when RBI changes SLR, CRR etc banks will announce chnage in PLR and other loans interest will be changed accordingly
CAR: Capital Adequacy ratio is the amount of capital that shareholders should put in for each 100 deposits with bank. for ex if CAR is 12.5% and a bank has a deposit base of 100, then Bank's share capital+reserves and surplus should be atleasts 12.5

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