CRR

Cash Reserve Ratio (CRR) 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.

Under the new rules, the scheduled banks will have to maintain 6.5 per cent CRR with the central bank from their
total demand and time liabilities on a bi-weekly basis

SLR

Apart from Cash Reserve Ratio (CRR), 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. Treasury bills, dated securities
issued under market borrowing programme and market stabilisation schemes (MSS), etc also form part of the SLR.
Banks have to report to the RBI every alternate Friday their SLR maintenance, and pay penalties for failing to
maintain SLR as mandated. Currently the conventional banks are maintaining with the BB the SLR at 19 percent,
including the CRR.

What is Bank rate?

Bank Rate is the rate at which central bank of the country (in India it is RBI) allows finance to commercial banks. Bank
Rate is a tool, which central bank uses for short-term purposes. Any upward revision in Bank Rate by central bank is
an indication that banks should also increase deposit rates as well as Base Rate / Benchmark Prime Lending
Rate. Thus any revision in the Bank rate indicates that it is likely that interest rates on your deposits are likely to
either go up or go down, and it can also indicate an increase or decrease in your EMI.

Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows
money from commercial banks within the country. It is a monetary policy instrument which can be used to control
the money supply in the country.

An increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant.
An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the
RBI, thereby decreasing the supply of money in the market.

A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. The dealer
sells the government securities to investors, usually on an overnight basis, and buys them back the following day.
Call money rate

Call money rate is the rate at which short term funds are borrowed and lent in the money market.

Description: The duration of the call money loan is 1 day. Banks resort to these type of loans to fill the asset liability
mismatch, comply with the statutory CRR and SLR requirements and to meet the sudden demand of funds. RBI,
banks, primary dealers etc are the participants of the call money market. Demand and supply of liquidity affect the
call money rate. A tight liquidity condition leads to a rise in call money rate and vice versa.

Money at call and short notice

A definition of the term money at call and short notice is presented. It refers to advances made by banks to other
financial institutions, or corporate and personal customers, that are repayable either upon demand or within 14 days
in Great Britain, balances in an account that are either available upon demand.

Loan creates deposit

When we say loans create deposits, we mean at least that the marginal impact of new lending will be to create a
new asset and a new liability for the banking system typically for the originating lending bank at first. A bank makes
a loan to a borrowing customer. That is a debit under bank assets. Simultaneous, it credits the deposit account of the
same customer. That is a new bank liability. Both of those accounting entries represent increases in their respective
categories. This is operationally separate from any notion of reserves that may be required in association with the
creation of bank deposits.

In another version of the same lending transaction, the lending bank presents the borrower with a cheque or bank
draft. The lending bank debits the borrowers loan account and credits a payment liability account. The banks
balance sheet has grown. The borrower may then deposit that cheque with a second bank. At that moment, the
balance sheet of the second bank the deposit issuing bank grows by the same amount, with a payment due asset
and a deposit liability. This temporary duplication of balance sheet growth across two different banks is captured
within the accounting classification of bank float. The duplication gets resolved and eliminated when the deposit
issuing bank clears the cheque back to the lending bank and receives a reserve balance credit in exchange, at which
point the lending bank sheds both reserve balances and its payment liability. The end result is that the system
balance sheet has grown by the amount of the original loan and deposit. The loan has created the deposit, although
loan and deposit are domiciled in different banks. The system has expanded in size. The growth is now reflected in
the size of the deposit issuing banks balance sheet, with an increase in deposits and reserve balances. The lending
banks balance sheet size is unchanged from the start (at least temporarily), with loan growth offset by a reserve
balance decline.