What is Cash Reserve Ratio (CRR)

Each bank has to keep a certain percentage of its total deposits with RBI as cash reserves. It is called Cash Reserve Ratio (CRR). On 30th October.2012, RBI reduced the CRR by 25 basis points to 4.25%. If the bank is having a deposit of 100/-, it has to keep Rs.4.25 as cash reserve with RBI and it can use only the balance 95.75 for lending or investments.

What is the role of CRR in the banking system

RBI uses CRR as a means to control the money supply in the system. When the money supply is on the higher side, RBI will increase the CRR to reduce the supply and vice versa.

What is (SLR)
SLR is 23%.

Statutory

Liquidity

Ratio

Every bank has to maintain at the close of every day a certain percentage of its total liabilities (Deposits) in cash, gold or government approved securities. This is called SLR. At present, the

What is the role of SLR in the banking system

Its role is more or less similar to CRR and controls the money circulation the banking system. If RBI wants to suck, excess liquidity from the system, it will increase the SLR. Banks will be forced to keep the higher percentage as liquid assets and its power to lend will come down.

What is Repo Rate

When banks require short term money, RBI will lend member banks against securities held by them. RBI will charge interest on these loans and this rate of interest is called Repo Rate. At present, Repo Rate is 8%.

What is the importance of Repo Rate in the economy

When RBI wants to decrease the lending activities in the country, it will increase the Repo Rate. Once the Repo Rate is increased, the cost of funds to banks from RBI will increase and it will in turn increase the lending rates to customers. This will reduce the lending transactions. But if the

RBI feels the need of more lending activities, it will decrease the Repo Rate and reduce the cost of funding. This will translate into lower rates on loans and lending will pick up.

What is Reverse Repo Rate

If banks have excess amount with them, they can park the surplus money with RBI and earn interest on this. The interest on such amount is called Reverse Repo Rate. At present the Reverse Repo Rate is 7%. RBI will increase the reverse Repo rate, if it wants to reduce liquidity in the system. Banks will be tempted to park money with RBI rather than lending, if this rate is high. At present Reverse Repo Rate is kept 100 basis points below Repo Rate. By adjusting CRR, SLR, Repo Rate and Reverse Repo Rate, RBI will ensure that the banking system is working fine. It will adjust these factors to promote an orderly growth of the economy by controlling interest rates and liquidity in the system. a.) Hypothecation is a mode of security in which bank extends the assistance to the company against the security of movable property. Neither the property nor the possession of the goods hypothecated is transferred to the bank. If the company fails to repay the amount of assistance, in such case the bank has the right to sell the goods hypothecated to realize the outstanding amount of assistance granted by it to the company. A consumer entering into a mortgage agreement is an example of Hypothecation. b.) Pledge is a mode of security in which bank extends the assistance to the company against the security of movable property. But the possession of the goods is with the bank and the goods pledged are in the custody of the bank. Thus, it becomes the duty of the bank to take care of the goods in the custody. In case the company is unable to repay the amount of assistance, the bank has the right to sell the goods pledged to realize the outstanding amount. c.) Lien is a mode of security in which the bank retains the goods belonging to the company until the debt due to the bank is paid. Lien is of two types: Particular Lien and General Lien. Normally, Bank enjoys general Lien. d.) Mortgage is a mode of security in which the legal interest in a specific immovable property is transferred as security for the payment of debt. The party who transfers the interest is called mortgager and party in whose favour the interest is so transferred is called mortgagee. The borrower possesses the property while the bank gets full legal title, subject to borrowers right, to repay to debt.