RBI Governor’s address on Indian response to world economic crisis, delivered on 27th March 2020 on account of COVID virus

My sister Smt. Uma Srinivasan, a globe trotting expert on Indian banking asked me to write an article on banking in response to emerging economic crisis. The following article is being written based on RBI Governor speech released on March 27, 2020 related to various developmental and regulatory policies that would alleviate the stress in financial conditions faced by Indian banks.

Some of the developmental and regulatory policies that would address the stress in banking sector on account of COVID virus mentioned in his speech were:

  • Expanding liquidity in the system enabling financial market and institutions to function normally.
  • Reinforcing monetary transmission for free flow of banking credit on easier or cheaper terms to those affected by COVID related dislocations
  • Easing repayment conditions for borrowers affected by the dangerous pandemic
  • Improving the functioning of financial markets which had been showing the most violent behavior never seen in India so far.

The speech can be read from following web address:

https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49582

“Easier said are the words,” uttered a wise man. But RBI Governor, a veteran bureaucrat combined with worldly wisdom by decades of actual experience in monetary theory and practice, informed the people the following action points:

a) Cash reserve ratio:

As a one-time measure to tide over the issues raised by C, RBI has decided to reduce Cash Reserve Ratio (CRR) of all banks by 100 basis points to 3.0 per cent of net demand and time liabilities (NDTL) with effect from the reporting fortnight beginning March 28, 2020. “This reduction in the CRR would release primary liquidity of about ₹ 1,37,000 crore uniformly across the banking system in proportion to liabilities of constituents rather than in relation to holdings of excess SLR. This dispensation will be available for a period of one year ending on March 26, 2021.

b. Furthermore, taking cognizance of hardships faced by banks in terms of social distancing of staff and consequent strains on reporting requirements, it has been decided to reduce the requirement of minimum daily CRR balance maintenance from 90 per cent to 80 per cent effective from the first day of the reporting fortnight beginning March 28, 2020. This is a one-time dispensation available up to June 26, 2020” said the Governor.

  • Further, RBI also decided to reduce the requirement of minimum daily CRR balance maintenance from 90% to 80% effective from first day of reporting fortnight beginning March 28, 2020.
  • Reduction in CRR would release Rs 1.37 lac crore across the banking system uniformly. To be called one-time dispensation, it is available up to June 26, 2020.

c) Targeted long Term Repos Operations (TLTROs)

Rapid propagation of C, unsettled the capital market resulting in huge sell-offs of bonds, domestic equity, and forex markets unheard of, in recent memory. With redemption pressures, liquidity premia on above instruments surged. To offset the thinning of capital, RBI would conduct auctions of targeted term repos of up to three years tenor of appropriate sizes for a total amount up to Indian ₹ of 1,00,000 crores at a floating rate linked to the policy repo rate.

The caveat to the above activity is the requirement of liquidity acquired by banks under above scheme to be deployed in investment grade corporate bonds, commercial paper and non-convertible debentures. To be called as held to maturity even in excess of 25% total investment, it is to be permitted to be included in the HTM portfolio. They would not be reckoned under the large exposure framework.

The first auction was held on 27th March 2020.

d) Marginal Standing Facility

Under Marginal Standing Facility, banks are now allowed to dip into 2% into Statutory Liquidity Ratio (SLC) overnight. To enable the banks to have a better comfort of liquidity, the limit has been increased to 3% enlisting an additional of ₹ 1,37,000 crore to be released among the banking system.

The above three measures are expected to inject a total liquidity of ₹3.74 lac crore to the system.

Widening of the Monetary Policy Rate Corridor

By widening the rate corridor from 50 bps to 65 bps, the reverse repo rate under liquidity adjustment facility would be 40 bps lower than the policy repo rate.

Regulation and supervision

To provide relief to borrowers the following measures were undertaken.

  • Moratorium on term loans: All banks and lending institutions have been permitted to allow a moratorium of three months on payment of instalments on term loans outstanding as on March 31, 2020.Consequently, repayment schedule would shift to June 30, 2020.Working capital facilities and overdraft to borrowers would get a deferment of three months interest to June 2020.Rescheduling of drawing power and postponement of payments would not qualify as a default.
  • Deferment of implementation of Net Stable Funding Ratio: As per the prescribed timeline, banks in India should have been required to maintain NSFR of 100% from April 1, 2020 but to face extreme economic stress, the date has been shifted to October 1, 2020. Similarly, the last tranche of 0.625% to buffer up Capital Conservation Buffer has been shifted from March 31, 2020 to September 30, 2020.
  • Financial markets: To reduce arbitrage between off shore and onshore branches, RBI has decided to permit banks in India which operate International Financial Services Centre (IFSC) Banking Units (IBUs) to participate in the NDF market with effect from June 1, 2020. Banks may participate through their branches in India, their foreign branches or through their IBUs.

The basic purpose of RBI Governor’s address is to inform provision of liquidity, helping borrowers to get time to pay their term loans for more time and allowing historic freedom to banks to face C virus and consequent economic crisis head on than meekly surrendering to its after effects.

The purpose of my article is not to just explain RBI Governor’s speech but to understand the two key words” Cash Reserve Ratio” and “Statutory Liquidity Ratio” as defined by RBI through its master circulars and how does it supervise the submission of timely information on these ratios to RBI and how does it monitor the same. Detailed information on these ratios was given on its master circular dated July 01, 2015 which is being reproduced for exhaustive information of all readers. Now that all of us are home bound for reasons known to us, upgrading our knowledge through RBI master circular is appropriate.

https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9905

Let us understand some fundamental facts about “CRR”

Cash Reserve Ratio

Being very technical in nature, I intend using Question and Answer format for understanding CRR.

What is CRR and why it is being prescribed by RBI directions?

RBI has in terms of section 42(1) of RBI Act of 1934, prescribed CRR for Scheduled Commercial Banks without any floor or ceiling rate. Currently, it is at 3% of a bank’s total of Demand and Time Liabilities (DTL). RBI can also prescribe incremental CRR though it has not yet been prescribed.

Can I know what are Demand Liabilities?

Simply defined as liabilities which are payable on demand, we may give the details, as under.

  • Current deposits, demand liabilities 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, Mail transfers, demand drafts, unclaimed deposits and deposits held as security for advances, payable on demand.

Natural corollary to previous question, what are time liabilities?

Those liabilities payable other than on demand. A simple answer.

But some examples are given as under:

  • Fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities of savings fund deposits (daily average kept over a fortnight above which variations are noted), margin against L/Cs if not payable on demand, deposits held as securities for advances not payable on demand.

Other demand and time liabilities (ODTL)

Six of them like interest accrued on deposits, bills payable, unpaid dividends, suspense accounts of balances which are due to other banks, net balances in branch adjustment account etc.

Cash collaterals received under collateralized derivative transactions, and balance outstanding in the blocked account for more than 5 years in inter branch adjustment account are some others.

Yes, what about assets with the Banking system?

Balances with other banks as current accounts, balances with banks and other notified financial institutions, funds made available as advances or deposits repayable on fortnight or less but call or short notice does fall under this category.

Liabilities not included for DTL/NDTL computation

Following under-noted liabilities do not occupy liabilities part for CRR or SLR

12 items have been mentioned; some of the prominent ones are net income tax provision, amounts received from DICGC/ECGC, amounts from insurance companies as ad hoc payments, amounts from court receiver, subsidies from NABARD etc.

Exempted categories include liabilities of banking system in India in terms of section 42(1) of RBI act, 1934, DTL for off shore banking unit accounts, credit balances in ACU Accounts in US$.

CRR is calculated with a lag of one fortnight for easy facilitation. Banks do maintain CRR up to 95% of daily required reserves for a reporting fortnight.

Sad but true, RBI does not pay any interest on balances maintained by SCBs with RBI.

Yes, a lot has been said about CRR but how does RBI ensure its implementation?

Fortnightly return in Form A (CRR)

Under section 42(2) of RBI act, all SCBs are required to submit a provisional return in form A within 7 days from the expiry of relevant fortnight.  Final form is submitted within 20 days from the expiry of relevant fortnight.

Penalties for non-submission of above return.

Non maintenance of 95% of total CRR requirement, invites a penal interest of 3% above Bank rate on the amount actually falling short of minimum for the day, and if shortfall continues it leads to 5% penal rate.

Statutory Liquidity Ratio

Effective January 23, 2007, RBI can through Banking Regulation ACT, 2007 prescribe SLR for SCBs in selected assets. The value of such assets shall not be less than 40% of total DTL in India on the last Friday of the second preceding fortnight as RBI my notify in official gazette.

RBI has specified in 2015, that w.e.f.  the fortnight beginning February 07, 2015, every SCB shall continue to maintain the following assets in India not less than 21.5 % of the total NDTL as on the last Friday of the second preceding fortnight valued in accordance valuation specified by RBI.

  • Cash or in Gold valued at a price not exceeding the current market price or investment in following securities known as SLR securities:
  • Dated securities issued up to May 06, 2011
  • Treasury bills of Government of India
  • Dated securities issued under market borrowing program- me and Market Stabilization Scheme.
  • State government loans under market borrowing program- me.
  • Any other instrument that may be notified by RBI.
  • Any one can look at the updated SLR securities in the link of data base of https://www.rbi.org.in/Penalties

Failure to maintain SLR invites a penalty of 3% per annum over bank rate for that errant day and 5% over bank rate per annum if default continues.

Auditors to verify timely submission and its correctness in their statutory audit returns.

Fortnightly Return in Form (CRR)

Under section 42(2) of RBI act, all SCBs are required to submit a provisional return in form A within 7 days from the expiry of relevant fortnight. Final form is submitted within 20 days from the expiry of relevant fortnight.

Let us look at this, one of the most important returns expected to be submitted by all Scheduled Commercial Banks to RBI.

Form A

1. Liabilities to the Banking system in India

2. Liabilities to others in India

3. Assets with the Banking system in India

4. Cash in India

5. Investments in India

6. Bank credit in India

7. Net liabilities for the purpose of Section 42 of the Reserve Bank of India Act, 1934 = Net Liability to the Banking System + Liabilities to Others in India i.e.,( I-III} +II, if (I-III) is a plus figure or II only, If (I-III) is a minus figure.

8. Savings Bank Account (vide Regulation 7) Demand Liabilities in India Time Liabilities in India

Place:

Date:

Memorandum to Form A

1. Paid-up Capital 1.1 Reserves

2. Time Deposits 2.1 Short-term 2.2 Long-term

3. Certificates of Deposits

4. Net Demand and Time Liabilities (after deduction of liabilities under zero reserve prescription, Annexure A)

5. Amount of Deposits required to be maintained as per current rate of CRR

6. Any other liability on which CRR is required to be maintained as per current R B.I instructions under section 42 and 42(1A) of the Reserve Bank of India Act, 1934.

7. Total CRR required to be maintained under Section 42 and 42(1A) of the Reserve Bank of India Act, 1934.

Form 8 under rule 13A Of Section 18 and 24 of The Banking Regulation Act 1949 requires under annexure 2 various details of statement of demand and time liabilities, cash, gold and unencumbered approved securities for the month of —— which has to be submitted to RBI not later than 20 days after the end of the month to which it relates.

This is related to SLR return to be submitted to RBI.

Conclusion

One has to grab any opportunity to dive into the multitude of instructions issued by RBI called master circulars. The primary purpose of this article is to explain in simpleton’s language the address of RBI Governor 27th March 2020 to the nation in response to C virus and the resultant economic stagnation or crisis as one looks at. But I wanted to explain the crucial terms like CRR and SLR for a common man from master circular issued by RBI in 2015.

But I would like to know as a student of banking since 1973, how could RBI keep quiet even after receipt of crucial returns from commercial banks about historic Nirav fraud and other frauds which have been wrecking financial system including NBFCs. RBI may issue a detailed circular explaining its follow up measure.

In my days, RBI received weekly statement of affairs and then BSR returns regularly but when questioned about availability of data for monitoring banks/frauds or massive mismanagement of banks, both in private and public sector, it took the plea of non-receipt of essential information.

The story of frauds has continued again recently, particularly after 2008. Do we lack data at RBI or need to revisit the necessity to get new information to better monitor the banking system?

Better training programs or monitoring systems may be developed at RBI to govern the banks better.

At least Management trainees or Probationary officers of commercial banks ought to be educated more about CRR and SLR. Banks may create new cadre of bankers to have new monitoring of irregular operations.

All concerned relating to RBI must read all Master circulars of banking from RBI and particularly its share holders who might question the functioning of commercial banks if they deviate.

Reference

1. 1 Press release https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49582

2. RBI web site

3. https://www.rbi.org.in/

4. Master circular

5. https://rbidocs.rbi.org.in/rdocs/notification/PDFs/91CR010714FS.pdf

I would really appreciate if officials related to regulatory functions do share their experience with us.

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