STATUTORY LIQUIDITY RATIO (SLR)

Commercial banks are required to maintain in the form of cash, gold reserves, RBI approved securities before giving credit to the customers. It is directed under section 24 of the Banking regulation Act 1949. The SLR is determined by the RBI. It is usually used to control inflation and fuel growth by increasing and decreasing money supply. It controls the credit growth in India. The maximum limit of SLR is 40% and the minimum limit of SLR is 0 in India. The RBI always decides the percentage of SLR, If banks fails to control the required level of the SLR then it becomes responsible to pay penalty to RBI. When SLR is high banks have less money for commercial operations and hence less money to lend out when it happens, home loan interest rates often rise when the SLR is low, similarly home loan interest rates are likely to fall.  

Devaluation of Currency (Rupee) & Contingent Liabilities

 

Devaluation of Currency (Rupee)

Decreasing rupee value in foreign exchange market. In 1991 as a immediate measure to resolve the Balance of payment (BOP) crisis the rupee was devaluated against foreign currencies. This was to boost the exports and  this led to an increase in the inflow of foreign exchange. 

Contingent Liabilities 

Liabilities that may be incurred by an entity depending on the outcome of a uncertain future events such as court case, income tax disputes, sales tax disputes etc. These liabilities are not recorded in company accounts and shown in the balance sheet. 

MONETARY POLICY INSTRUMENTS

1. Repo Rate (4%): It is the rate at which the RBI lends money to commercial banks.

2. Reverse Repo Rate (3.35%): It is the rate at which the RBI borrows money from commercial banks.

3. Liquidity Adjustment Facility (LAF):  It is a monetary policy tool which allows banks to borrow money through repurchase agreements. Simply LAF is used to aid banks in adjusting the day to day mismatches in liquidity. LAF consists of repo and reverse repo operation.

4. Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow an additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.

5. Bank Rate/Discount rate (4.25%): It is the rate of interest which a central bank charges on the loans and advances to a commercial banks.  

6. Cash Reserve Ratio (CRR) (3.5%):  It is the amount of funds that the banks have to keep with the RBI.

7.  Statutory Liquidity Ratio (SLR) (18%): It is the term for reserve requirement for commercial banks in India which they have to maintain in the form of gold, government approved securities before providing credit to the customers.

8. Open Market Operations (OMOs): It refers to a central bank buying or selling short-term Treasuries and other securities in the open market in order to influence the money supply.

9. Market Stabilization Scheme (MSS): Market Stabilization scheme (MSS) is a monetary policy intervention by the RBI to withdraw excess liquidity (or money supply) by selling government securities in the economy

Helicopter money & Quantitative easing

 

Helicopter money

Helicopter money is the term used for a large sum of new money that is printed and distributed among the public, to stimulate the economy during a recession or when interest rates fall to zero. It is also referred to as a helicopter drop, in reference to a helicopter scattering supplies from the sky.

Quantitative easing

Quantitative easing (QE) is something a central bank can do to help the economy. It is done by buying bonds or other assets. With this, the interest rate will decrease and the rate of inflation will go up. It is usually used when inflation is very low or negative.

CAMELS Approach & Statutory Liquidity Ratio (SLR)

CAMELS Approach 

It is a supervisory rating system originally developed in the US to classify banks overall condition.  It is applied to every bank and credit union in the US. This approach came in India in early 1990s . In 1995 Reserve Bank of India set up a working group. 

C- Capital Adequacy 

A - Asset Quality 

M- Management Quality 

E- Earnings 

L- Liquidity 

S- Sensitivity 

Statutory Liquidity Ratio (SLR)

It refers amount that the commercial banks require to maintain in the form of gold or government approved securities before providing credit to the customers. The Maximum limit of SLR is 40% and Minimum is 0%. If banks are fail to maintain minimum, Reserve Bank of India impose penalty. 

SPECIAL PURPOSE VEHICLE

 

A special purpose vehicle/ special purpose entity (SPE)/off-balance sheet vehicle is a subsidiary created by a parent company with its own balance sheet to isolate financial risk. Its legal status as a separate company makes its obligations secure even if the parent company goes bankrupt. For this reason, a special purpose vehicle is sometimes called a bankruptcy-remote entity. Major loophole with this is Parent companies  become a financially devastating way to hide company debt, as seen in 2001 in the Enron scandal.

 

Effect of covid-19 lockdown on unemployment from January 2020 to January 2021