What is CRR & SLR position and What are the components of CRR & SLR?

As per Bangladesh Bank Monetary Policy Department Circular dated 01.12.2010, 11.5 o! total lia"ility to "e maintained "y #slami Banks in Bangladesh in t$o !orms% C&& 'Cash &eser(e &e)uirement* + and ,-& ',tatutory -i)uidity &e)uirement* 5.5 on the "asis o! ./5 0hursday a(erage "ase deposits o! one month earlier than that o! current month. #! the current month is 1une, calculation to "e made on the !igure o! April. #n a "road sense to understand the statutory li)uidity position o! a "ank, sometimes the $hole 11.5 reser(e is called ,-&. #n Con(entional Banks as per Circular o! Bangladesh Bank, the $hole ,-& to "e maintained at 12 out o! $hich + is C&&.

Bangladesh Bank impose penalty i! any Bank !ails to maintain ,tatutory reser(e and this de!ault re!lects on the CAM3-, rating o! a "ank. 4440he components o! C&& are% 'i* Balance $ith Bangladesh Bank 'ii* Bangladesh Bank 00 in transit 4440he components o! ,-& are% 'i* Cash in hand 'ii* 5oreign currency in hand 'iii* 5oreign currency clearing a/c/ Balance o! 5C account. 'i(* Balance $ith ,onali Bank '6here !unctioning as chest "ranch/agent o! Bangladesh Bank* '(* ,onali Bank 00 in transit '(i* Appropriate security '0reasury "ond, Mudara"a deposit "ond, etc* '(ii* Pri7e Bond.
What is BASEL-III? Basel III or the Third Basel Accord is a global, voluntary regulatory standard on bank capital adequacy, stress testing and market liquidity risk. It was agreed upon by the members of the Basel Committee on Banking upervision in !"#"$##, and was scheduled to be introduced from !"#% until !"#&, however, changes from April #. !"#% e'tended implementation until (arch %#. !"#).The third installment of the Basel Accords *see Basel I, Basel II+ was developed in response to the deficiencies in financial regulation revealed by the late,!"""s financial crisis. Basel III was supposed to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage. Capital requirementsThe original Basel III rule from !"#" was supposed to require banks to hold ..&/ of common equity *up from !/ in Basel II+ and 0/ of Tier I capital *up from ./ in Basel II+ of 1risk,weighted assets1 *23A+ Basel III introduced 1additional capital buffers1 *i+ a 1mandatory capital conservation buffer1 of !.&/ and *ii+ a 1discretionary counter,cyclical buffer1 which would allow national regulators to require up to another !.&/ of capital during periods of high credit growth. 4everage ratioBasel III introduced a minimum 1leverage ratio1. The leverage ratio was calculated by dividing Tier # capital by the bank5s average total consolidated assets. The banks were e'pected to maintain a leverage ratio in e'cess of %/ under Basel III. In 6uly !"#%, the 7 8ederal 2eserve Bank announced that the minimum Basel III leverage ratio would be 0/ for ) ystemically important financial institution * I8I+ banks and &/ for their bank holding companies. 4iquidity requirementsBasel III introduced two required liquidity ratios. The 14iquidity Coverage 2atio1 was supposed to require a bank to hold sufficient high,quality liquid assets to cover its total net cash outflows over %" days, the 9et table 8unding 2atio was to require the available amount of stable funding to e'ceed the required amount of stable funding over a one,year period of e'tended stress. What is Currency Note and Government Note? Currency 9ote is that is a promissory note on bank of issue promising to pay its face value to bearer on demand. A more common definition would be paper money with the intent to use as legal tender in a particular country or region. :'ample - Taka, 7; ;ollar, <ound etc.

=overnment note means the not printed by Bangladesh =overnment. The =overnment notes are signed by the 8inance ecretary whereas the Bank 9ote are signed by the =overnor of Bangladesh Bank. 9ote of Taka >ne, Taka two, and all coins are =overnment 9ote 9ote of Taka 8ive, Taka Ten, Twenty, 8ifty, ?undred, Taka 8ive ?undred and Taka Thousand are Bank 9ote.

In Simple words, Deferred Tax Liability is a Provision for Future Taxation. This is in stark Contrast to Provision for Taxation. Provision for Taxation is basically a provision for Current year Taxation. Deferred Tax Liability arises due to timing difference in the value of Assets as per Books of Accounts and as per ncome Tax Act. Also !e can say that Deferred Tax Liability"Asset arises due to the difference bet!een Profit as per Books of Accounts #P$L Account% and profit as per ncome Tax Act. #Taxable ncome%. Depreciation is the main reason for difference in the profits as per books of Accounts and Taxable profits as per ncome Tax Act. Both ncome Tax Act and Companies Act prescribe different rates of Depreciation for different categories of Assets. Let me illustrate !ith a simple example. &uppose a Company purchases a 'ind Turbine (enerator #'indmill%. The Depreciation !hich can be claimed in the Books of Accounts in as per Companies Act is let)s say *+, #assumed%. The Depreciation as per ncome Tax Act is -+, for 'indmill. .o! a 'indmill is purchased for /s. 0+1++1++1+++"2 #0+ Crores%. The Depreciation Claimed in the 3irst year is4 5alue of 'indmill4 Depreciation as per Books of Accounts4 Depreciation as per ncome Tax Act4 D 338/8.C8 DEFERRED T ! LI "ILIT# $ %&.'( 0+1++1++1+++ 6 *+,7 0+1++1++1+++ 6 -+,7 0+1++1++1+++" 2 *1++1++1+++"2 -1++1++1+++" 2

291++1++1+++"2 )*,+,,-&,&&&.)

#Deferred Tax Liability is created at the highest :arginal /ate of Tax i.e. ;+.<,% 'hat is the :eaning of Creating this Deferred Tax Liability of /s. 01-=1>+1+++"2 #?ne Crore eighty five lakhs forty thousand% t simply means that the company !ill definitely have a tax Liability of that much in the future years. This is because in the years to come the Depreciation as per ncome Tax Act will be lesser that the Depreciation as per Books of Accounts. @ence in these years the Company will /ave to 0reate a Deferred Tax sset 3or clarity the 3ollo!ing Table is provided. Let)s take the figures in Lakhs for 8asier Anderstanding4 Let 1indmill 2alue be Rs. *&&,&&&.) #ear Dep as per T Act #-+, 'D5% Dep as Books #*+, &L:% D 338/8.C8 DTL.DT $ %&.'( 9+1++ 2>1+++ + *+,,)*,3%6 & 2091-++ 20<1;9+ 20<1->+ + ?3 per *+1++ *+1+++ + *+1+++ *+1+++ *+1+++ 0++1+++ * 3 % ,4 T5T L

-+1++ 091+++ +

;1*++

9>+

09+

0++1+++

),,*'*.3& ),,'+3.3- )6,*%&.,6 &

.ote B n year = as per ncome tax act let)s assume the entire /emaining Balance is !ritten off 7587L9SI58S: 0. n Cear 0 Deferred Tax Liability amounting to /s. 0-1=>+"2 has to be created. This means that in Cear 01 the company has postponed its tax Liability of /s. 0-1=>+"2 to the 3uture years. This Liability !ill come back to the company one day or the other. #Anless -+ A is claimed% *. n Cear *1 as you can clearly see the Depreciation as per Books has gone up. This means that Depreciation as per T act !ill be lesser as a result the profit as

per T Act !ill be more and as a result the company has to pay /s. 0*;9"2 more tax during this year. ;. Thus in the remaining years the company !ill have Deferred Tax Assets And the Deferred Tax Liability created in the first year !ill be reversed in the subseDuent > years. >. Thus !hen the 'D5 of Assets as per Books and 'D5 as per T Act both become E8/?1 there is neither Deferred Tax Liability nor Deferred Tax Asset as there is no timing Difference Deferred Tax is purely an accounting Concept. A& ** 2 FAccounting for Taxes on ncome deals !ith Deferred Tax. The follo!ing are the Accounting treatment and Tax treatment of Deferred Tax4 77598TI8; E8TRIES: P$L A"c Dr To Deferred Tax Liability A"c 0-1=>+.++ 0-1=>+.++

#Being Deferred Tax Liability created in Cear 0 at the :aximum :arginal /ate of Tax% Deferred Tax is s/own under Provisions in "alan0e S/eet. Deferred Tax Asset Dr To P $ L A"c 01*;9.++ 01*;9.++

#Being Deferred Tax Liability /eversed in Cear *% 3inally at the end of Cear = the Balance &heet !ill be thus4 PR52ISI58S: Rs.Ps Deferred Tax Liability Less4 /eversed upto year > /eversed in year = T ! TRE T<E8T: 0*>+<.>> 90;+.=9 0-1=>+ + 0-1=>+

I875<E FR5< "9SI8ESS: .et Profit as per P$L A"c 666

Add4 Deferred Tax Liability Less4 Deferred Tax Asset

666 666

.ote4 As Deferred Tax Liability is a Provision1 it should be disallo!ed as an expense. Also deferred tax asset should be deducted from ncome. As seen from the above1 deferred tax liability"asset does not affect tax computation. Some Important Ratio: 8et #nterest #ncome 9 #nterest #ncome : #nterest 3;pense 8et 8on:interest #ncome 9 8on:interest #ncome : 8on:interest 3;penses 8et #nterest Margin 9 '#nterest #ncome < #nterest 3;penses* / 0otal Assets =perating 3!!iciency &atio 9 0otal =perating 3;penses / 0otal =perating #ncome P-- 9 Pro(ision !or -oan -osses / -oans Burden 9 '8on #nterest =p 3;penditure : 8on #nterest #ncome*/ A(erage Assets &=A 9 8et #ncome / 0otal Assets &=3 9 8et #ncome / 0otal 3)uity 3)uity Multiplier '3M* 9 0otal Assets / 0otal 3)uity 3)uity to Asset &atio 9 0otal 3)uity / 0otal Assets 88#M9 8et 8on:interest #ncome / 0otal Assets SELECTED PROBLEM: 1. A summari7ed Balance sheet and other rele(ant in!ormation o! Modern Bank -td, is gi(en "elo$% -ia"ilities > Capital Amount Assets Amount '0k.* '0k.* Deposit 5000 Cash ?00 Borro$ing 1000 -oans +000 Capital ?00 0otal +?00 0otal +?00 A(erage interest rate on deposit 11 and on "orro$ing is 5 . 0otal administrati(e e;penses e)ual 0k. 150. #n(estors e;pected rate o! return on the capital is 20 . 0otal amount o! "ad loan e)uals 0k. @5. Calculate -oan PriceA SOL TIO!: -oan Price 9 'Cost o! 5und B Cost o! Administration B Cost o! Capital* B &isk Premium '0otal Deposit 4 A(g. int. rate* B '0otal Borro$ing 4 Borro$ing &ate* Cost o! 5und 9

CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC CCCC. 0otal -oans > Ad(ances '5000 4 11 * B '1000 4 5 * 9 CCCCCCCCCCCCCCCCC +000 9 10

0otal Administrati(e 3;penses 150 Cost o! Administration 9 CCCCCCCCCCCCCCCCCCC CCCCC 9 2.5 0otal -oans > Ad(ances +000 '0otal Capital 4 #n(estors e;pected &ate* '?00 4 20 * Cost o! Capital 9CCCCCCCCCCCCCCCCCCCCCCCCCCC 9 CCCCCCCC. 9 2.+@ 0otal -oans > Ad(ances +000 0otal Bad > -oss -oan &isk Premium 9 CCCCCCCCCCCCCCCCCCCC 9 1.25 0otal -oans > Ad(ances So" Loan Price # $%& ' ()*& ' ()+,& ' $)(*& # $+)-(& 2.

SOL TIO!: &6A 9 '120040 * B '1000 4 20 * B '2000450 * B '.500 4 100 * 9 0 B 200 B 1000 B .500 9 5@00 Core Capital 9 '&6A 4 5 * 9 2?5 Minimum Capital &e)uirement 9 '&6A 4 10 * 9 5@0 D.

SOL TIO!: &=A 9 '8et #ncome / 0otal Asset* 0otal Asset 9 2000000 / 1.25 9 1+0000000 &=3 9 '8et #ncome / 0otal 3)uity* 0otal 3)uity 9 2000000 / 1D.5 9 1.?1.?15 3)uity Multiplier 9 '0otal Assets / 0otal e)uity* 9 10.?0 3)uity to asset ratio 9 '0otal 3)uity / 0otal Asset* 9 2.2+ 'iii* 8e$ 3)uity 9 1.?1.?15 < 1000000 9 1D?1.?15 8et #ncome 9 2000000 B 200000 9 2200000 &=3 9 '8et #ncome / total 3)uity* 9 2200000/ 1D?1.?15 9 15.22
>. (iven4 /?870=,1 Tax /ate7>+,1 Total Asset7*= Crore1 Total Liability70= Crore.

8et 8on:#nterest 3;pense9 1.5 , P--90.D5 o! total Asset. 5ind out the 8et #nterest Margin '8#M*. SOL TIO!: Ei(en, 0otal Assets 9 0k. 25 Crore 0otal -ia"ilities 9 0k. 15 Crore ,o, 0otal 3)uity 9 0k. '25 : 15* 9 0k. 10 Crore &=3 9 15 ,o, Pro!it A!ter 0a; 9 0k. '10 4 15 * Crore 9 0k. 1.5 Crore ,o, Pro!it Be!ore 0a; 9 0k. 1.50/ '1 : 0..0* 9 0k. 2.50 Crore Fere, Pro(ision !or -oan -osses 9 0k. 25 4 0.D5 9 0k. 0.0?@5 Crore 8et 8on:#nterest #ncome '3;penses* 9 0k. 25 4 '1.5 * 9 0k. '0.D@5* Crore 6e Gno$, Pro!it Be!ore 0a; 9 8et #nterest #ncome : Pro(ision !or -oan -osses B 8et 8on #nterest #ncome i.e., 2.50 9 8## : 0.0?@5 : 0.D@5 ,o, 8## 9 2.50 B 0.0?@5 B 0.D@5 9 2.2+25 Crore ,o, 8et #nterest Margin '8#M* 9 8## / 0otal Assets 9 2.2+25/25

9 0.11?5 or 11.?5 . 'Ans$er* 5. 8et #nterest #ncome is 0k. 10000, non:interest e;penses is 0k. 15000, -ia"ilities is 0k. 200000 and e)uity is 0k. 150000, 0otal income is 0k. +0000, interest e;pense in 0k. 25000. Calculate 'i* &=3, 'ii* &=A, 'iii*8#M, 'i(*88#M SOL TIO!: 8et #nterest #ncome 9 #nterest #ncome < #nterest 3;pense #nterest #ncome 9 10000 B 25000 9 D5000 0otal #ncome 9 #nterest #ncome B 8on:interest #ncome 8on:interest #ncome 9 +0000 < D5000 9 25000 8et non:interest income 9 non:interest income < non:interest e;pense 9 25000 < 15000 9 10000 0otal Asset 9 -ia"ility B 3)uity 9 200000 B 150000 9 D50000 'i* &=3 9 '8et #ncome / 0otal 3)uity* 9 H'8et #nterest #ncome B 8et non:interest income* / 0otal 3)uityI 9 '10000 B 10000*/ 150000 9 1D.DD 'ii* &=A 9 '8et #ncome / 0otal Asset* 9 20000 / D50000 9 5.@1 'iii* 8#M 9 8et interest #ncome / 0otal Asset 9 10000 / D50000 9 2.?+ 'i(* 88#M 9 8et 8on:interest #ncome / total Asset 9 2.?+ +. #! a "ank has a net interest margin o! 2.50 , a noninterest margin o! :1.?5 , and a ratio o! pro(ision !or loan losses, ta;es, security gains, and e;traordinary items o! :0..@ , $hat is its &=AA SOL TIO!: &=A 98et interest margin B 8oninterest margin < &atio o! pro(ision !or loan losses, ta;es, security gains, and e;traordinary items 9 2.50 B ':1.?5 * < ':0..@ * 9 1.12