RBI Monetary Policy -What is NDTL, CRR and SLR?

Reserve Bank of India, RBI, is the Central Bank of India and regulatory body of the Indian Banking system. You must have encountered that RBI has taken some measures to control inflation or RBI has taken some measures to increase growth in economy. Indian economy is free economy which is Demand and Supply driven. But when inflation is too high or Growth of the economy gets stuck, RBI plays a crucial role to make road ahead from these situations. How RBI controls inflation and increase Growth in economy, to understand it you need know three important terms NDTL, CRR and SLR. Let’s discuss them in first place-

Net Demand and Time Liabilities (NDTL)-

NDTL is the difference in Demand Liabilities and Time Liabilities (deposits) of a bank and the deposits in any assets which is held by any other bank. To simply put it is Net Liability of a bank. To understand NDTL we need to understand the business model of Bank-

In banks there are two types of entities who deposit their money- First is General Public and Second is any private or public organization, it can be small business or a large corporate. These deposits can be in any form like Saving account deposits, Current account deposits, Fixed deposits, Letter of credit, Bank Guarantee etc. These deposits are Liabilities on bank because bank has to return this money with interest. The money which bank gets through deposits- it gives this money as Loan either to an individual in form of Home loan, Car loan, Education loan or to Corporate or Business owners for their projects or business expansion. These loans are Assets for the bank because it will get this money with interest. The difference in Interest between Loans and Deposits is the Income of bank.

Now you know the Liabilities of Banks but what is Demand and Time Liabilities?  Demand Liabilities are those which can be demanded by its owner at any time. For example- your saving account deposits are Demand Liabilities on bank as you can withdraw this money any time. Saving account, Current account, Letter of credit, Bank guarantees all these are Demand Liabilities. Now, Time Liabilities are those deposits in which a time frame is attached. For example- Term Fixed Deposits, Recurring Deposits, Cash certificates etc.  They can only be withdrawn after certain time period as per agreement (it can be withdrawn prematurely but there will be penalty in such cases). There is some Other Demand and Time Liabilities for banks called ODTLs like Interest accrued on Deposits, Bill payable by bank etc. When we sum all these Demand and Time Liabilities and ODTL it gives Demand and Time Liabilities of that bank. Banks also deposit money to some other banks to get interest on it, when we subtract this deposit amount we get Net Demand and Time Liabilities (NDTL) of the Bank. So NDTL is calculated as-

NDTL = Demand Liabilities + Time Liabilities+ ODTL – Deposits in other banks

This is the whole concept of NDTL; its significance is that- the important terms like CRR and SLR are calculated considering NDLT as its base value.

Cash Reserve Ratio (CRR): CRR is a percentage number of cash reserve that is compulsorily every commercial bank is obligated to maintain with RBI. This percent is called Cash Reserve Ratio, CRR, it is calculated on NDTL as its base value. Suppose a bank has Rs. 100 crores of NDTL, currently CRR is 4.5%, so this bank has to maintain compulsorily Rs. 4.5 crores with RBI. RBI does not owe any Interest to banks for CRR, so banks prefer it as low as possible.

Statutory Liquidity Ratio (SLR): SLR is a percentage number of cash reserve that is compulsorily every commercial bank is obligated to maintain with itself. Banks can maintain this reserve requirement in the form of approved securities like gold, cash, government bonds or any other approved securities. This percent is called Statutory Liquid Ratio, SLR; it is also calculated on NDTL as its base value. Taking the same example of a bank that has Rs. 100 crores of NDTL, currently SLR is 18%, so this bank has to maintain compulsorily Rs. 18 cores to itself or in form of approved securities. Through SLR banks get some interest as per the securities investment, so higher SLR is less problematic to banks as compared to CRR.

CRR and SLR are introduced for liquidity and solvency issues; it is kind of emergency funds of banks. Banks should always have money to give its customer in all situations and in this way the trust on banking system by public goes on. These ratios/percents change as per RBI circulation and they are decided by RBI in its Monetary Policy review which usually take place atleast 4 times in a Financial Year. With the help of CRR and SLR, RBI use to control Inflation and sometimes push on Growth by adjusting these ratios.

How RBI can use SLR and CRR that can impact on Inflation and Growth in Economy-

Banks can give Loans after deducting CRR and SLR from its NDTL. Currently banks can give Loans of 100 – 4.5 -18 = 77.5% of their NDTL. If a bank has NDTL of 100 crores it can give Loans maximum of Rs. 77.5 crores.

Before 1990 and LPG (Liberalisation, Privatisation, Globalisation), the values of CRR and SLR combined use to be around 45-50% and there was very less funds available for banks to give loans. Loan interest rates were very high around 16%, so people don’t prefer to take loans and they just rely on their savings for the Growth of their business or for their personal needs. Hence it slowed down the growth, it reduced demand, in turn, prices of Goods and Services also gone down and inflation was controlled. But controlled inflation with no growth is of no use. Hence, RBI started reducing CRR and SLR after 1990s and now in 2022, it is combined of 22.5%. RBI is giving opportunity to Growth based economy. But in case, inflation gets out of hand RBI starts increasing CRR and SLR so that it curbs money supply and in turn reduce demand and reducing demand will automatically results in price reduction of Goods and Services and it controls the inflation.

This is how RBI tries to maintain balance between Growth and Inflation, both factors are very important for Growing economy.

Finance Tapasvi