CRR & SLR Management

Cash Reserve Ratio (CRR) It 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.

CRR is set according to the guidelines of the central bank of a country.

RBI can vary CRR between 3% & 15%. Current CRR rate is 4%

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

The higher the reserve requirement is set, the less funds banks will have to loan out, leading to lower money creation and perhaps ultimately to higher purchasing power of the money previously in use.

Determinants of CRR Banking habits of people Nature of accounts Size of deposits Structure of money market

The ratio of liquid assets to net demand and time liabilities (NDTL) is called statutory liquidity ratio (SLR).

Banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold and unencumbered securities.

Banks have to report to the RBI every alternate Friday their SLR maintenance, and pay penalties for failing to maintain SLR as mandated. 

Current SLR rate is 21.5%

Statutory liquidity ratio (SLR)

• SLR rate = {liquid assets / (demand + time liabilities)} × 100%

OBJECTIVES OF SLR: to control the expansion of bank

credit. By changing the level of SLR, the Reserve Bank of India can increase or decrease bank credit expansion.

to ensure the solvency of commercial banks.

to compel the commercial banks to invest in government securities like government bonds.

CRR controls liquidity in banking system while SLR regulates credit growth in the country.

to meet SLR, banks can use cash, gold or approved securities whereas with CRR it has to be only cash.

CRR is maintained in cash form with central bank, whereas SLR is money deposited in govt. securities.

Difference between CRR & SLR

A financial institution is an establishment that conducts financial transactions such as investments, loans and deposits. Everything from depositing money to taking out loans and exchanging currencies must be done through financial institutions. Most financial institutions are regulated by the government.Some financial institutions are :•commercial banks •credit unions•savings and loans• securities broker dealers• insurance companies• investment bankers and •credit card system operators.

Financial instituions.

Commercial BanksCommercial banks accept deposits and provide security and convenience to their customers. With banks, consumers no longer need to keep large amounts of currency on hand; transactions can be handled with checks, debit cards or credit cards, instead. Commercial banks also provide loans that individuals and businesses use to buy goods or expand business operations, which in turn leads to more deposited funds that make their way to banks. Banks lend money at a higher interest rate than they have to pay for funds and operating costs, and thus, they make money.

Investment Banks Investment banks may be called "banks," but their operations are far different than deposit-gathering commercial banks. An investment bank is a financial intermediary that performs a variety of services for businesses and some governments. These services include underwriting debt and equity offerings, acting as an intermediary between an issuer of securities and the investing public, acting as a broker for institutional clients. They may also provide research and financial advisory services to companies.

Borrowing and lending behaviour

Insurance CompaniesInsurance companies pool risk by collecting premiums from a large group of people who want to protect themselves against a particular loss, such as a fire, car accident, illness, lawsuit, disability or death. Insurance helps individuals and companies manage risk and preserve wealth. By insuring a large number of people, insurance companies can operate profitably and at the same time pay for claims that may arise. Insurance companies use statistical analysis to project what their actual losses will be within a given class. They know that not all insured individuals will suffer losses at the same time or at all.

BrokeragesA brokerage acts as an intermediary between buyers and sellers to facilitate securities transactions. Brokerage companies are compensated via commission after the transaction has been successfully completed. For example, when a trade order for a stock is carried out, an individual often pays a transaction fee for the brokerage company's efforts to execute the trade.

Investment CompaniesAn investment company is a corporation or a trust through which individuals invest in diversified, professionally managed portfolios of securities by pooling their funds with those of other investors. Rather than purchasing combinations of individual stocks and bonds for a portfolio, an investor can purchase securities indirectly through a package product like a mutual fund.

VALUATION OF INVESTMENTThe process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.

For example, an analyst valuing a company may look at the company's management, the composition of its capital structure, prospect of future earnings, and market value of assets.Judging the contributions of a company's management would be more of a subjective valuation technique, while calculating intrinsic value based on future earnings would be an objective technique.

Valuation methodsDirect valuation methods provide a direct estimate of a company’s fundamental value. In the case of public companies, the analyst can then compare the company’s fundamental value obtained from that valuation analysis to the company’s market value. The company appears fairly valued if its market value is equal to its fundamental value, undervalued if its market value is lower than its fundamental value, and overvalued if its market value is higher than its fundamental value. In contrast, relative valuation methods do not provide a direct estimate of a company’s fundamental value: They do not indicate whether a company is fairly priced; they indicate only whether it is fairly priced relative to some benchmark or peer group. Because valuing a company using an indirect valuation method requires identifying a group of comparable companies, this approach to valuation is also called the comparables approach.

Direct (or Absolute) Valuation Methods

Relative (or Indirect) Valuation Methods

Valuation methods that rely on cash flows

Discounted cash flow models:Free cash flow to the firm modelFree cash flow to equity modelAdjusted present value modelOption-pricing models:Real option analysis

Price multiples:Price-to-cash-flow ratio

Valuation methods that rely on a financial variable other than cash flows

Economic income models:Economic value analysis

Price multiples*:Price-to-earnings ratios (P/E ratio, P/EBIT ratio, and P/EBITDA ratio)Price-to-sales ratioPrice-to-book ratioEnterprise value multiples:EV/EBITDA multipleEV/Sales multiple

* E stands for earnings; EBIT for earnings before interest and taxes; EBITDA to earnings before interest, taxes, depreciation, and amortization; and EV for enterprise value.

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