How is CRR used as a tool of credit control?

CRR was introduced in 1950 primarily as a measure to ensure safety and liquidity of bank deposits, however over the years it has become an important and effective tool for directly regulating the lending capacity of banks and controlling the money supply in the economy. When the RBI feels that the money supply is increasing and causing an upward pressure on inflation, the RBI has the option of increasing the CRR thereby reducing the deposits available with banks to make loans and hence reducing the money supply and inflation. Does CRR apply to all scheduled banks? The CRR is applicable to all scheduled banks including the scheduled cooperative banks and the Regional Rural Banks (RRBs). The present level of CRR is 6.5%. Previously, there was a floor of 3% and ceiling of 20% on the CRR that could be imposed by the RBI; however since 2006 there is no minimum or maximum level of CRR that needs to be fixed by the central bank of India. At present, the RBI does not pay any interest to the banks on the CRR deposits. Prior to 1962, a separate CRR was fixed in respect of demand and time liabilities, however after 1962 the separate CRRs were merged and one CRR came into effect for both demand and time deposits of banks with RBI. REPO RATE

Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.
IN OTHER WORDS repo and reverse repo rate are the rates at which the rbi lends to banks and banks park excess funds with the central banks.

DISADVANTAGES IN UNIVERSAL BANKING :1. To meet with the increasing demands of customers. The establishment of new private sector banks and foreign banks have rapidly changed the competitive landscape in the Indian consumer banking industry and placed greater demands on banks to gear themselves up to meet the increasing needs of customers. For the dissatisfied current day bank customers, it is not only relevant to offer a wide menu of services but also provide these in an increasingly efficient manner in terms of cost, time and convenience. E.g.: Today there is a lot of burden on staff members, they are given no or less number of bank holidays, the time limit is 8-8. 2. Merger with DFI {Biggest Challenge}. Development Financial Institutions (DFIs) opting for conversion into Universal Banks by merger/reverse merger routes may also face certain difficult situations on account of Asset Liability Mismatches, burden of mounting NPAs and differences in regulatory prescriptions applicable to FIs and banks such as CRR and SLR requirements and priority sector lending. The

asset profile of DFIs in India is predominately of long-term nature, which also includes a very high level of non-performing assets. E.g.: NPAs of ICICI and IDBI were transferred to ICICI Bank and IDBI Bank respectively after their merger. 3. Statutory Liquid Ratio {SLR} and Cash Reserve Ratio {CRR} requirements of DFI. In case DFIs are converted into banks they would also be subject to the reserve requirement like banks. CRR and SLR burden that wasn't there for DFI will be applied after its merger with any bank. This would mean that all liabilities issued by the DFIs in the past would also be subject to reserve requirements and since the assets structure of DFIs are largely of long term nature it would be very difficult for them to maintain the required level of SLR/CRR. 4. High cost of funds for DFI. Cost of deposits is high as the only source of funds is Fixed Deposits having higher Rate Of Interest. Costs of funds for Fixed Deposit are higher than CASA {Current account Savings account}. CASA has low cost, as the Rate Of Interest is low. Further, the cost at which DFIs have been raising resources in the past has generally remained high as compared to banks and maintenance of CRR/SLR of such liabilities, which may earn lower returns, would adversely affect the profitability of Universal Banks. Compliance of priority sector lending norms, which earn lower returns, may also create difficult situations for such bank. Risk Management is one of the major challenges, where in the financial activity carries with it various risks, which would need to be identified, measured, monitored and controlled by Universal Banks. The nature of risks and mitigating techniques for different financial product/services will be different and therefore, Universal Banks will be required to develop comprehensive system of each product/service and each kind of risk. 5. Improving risk management systems With the increasing degree of deregulation and exposure of banks to various types of risks, efficient risk management systems have become essential. For enhancing the risk management system in banks, Reserve Bank has issued guidelines on asset liability management and risk management systems in banks in 1999 and Guidelines Notes on Credit Risk Management and Market Risk Management in October 2002 and the Guidance Note on Operational risk management in 2005. E.g.: Today most banks have stopped personal loans because there is no guarantee, no loans are granted for travel and tourism, i.e. holiday loans too are stopped. 1. Supervisory and regulatory infrastructure Another aspect is related to building up of supervisory infrastructure. The regulatory framework would need to be strengthened so as to cover all aspects of Universal Banking either under control of one regulator or a co-coordinating mechanism would have to be developed among

different regulators like the Reserve Bank of India, SEBI, Insurance Regulatory, Authority etc. The regulators will have to frame sound mechanism to protect the interest of all concerned including the customer, the Universal Banking Institution and the financial system of the country. 1. Supervisory of financial conglomerates In view of increased focus on empowering supervisors to undertake consolidated supervision of bank groups and since the Core Principle for Banking Supervisory issued by the BASEL committee on Banking Supervision have underscored consolidated supervision as an independent principle, the Reserve Bank of India had introduced, as an initial step, consolidated accounting and other quantitative methods to facilitate consolidated supervision. The components of consolidated supervision include, consolidated financial statements intended for public disclosure, consolidated prudential reports intended or supervisory assessment of risk and application of certain prudential regulations on group basis. In due course, consolidated supervision as introduced above would evolve to cover. 1. Technology improvement and compensation and incentive systems for employees It is likely that Universal Banks of roughly the same size and providing roughly the same range of services may have very different cost levels per unit of output on account of efficiency differences in the use of labour and capital, effectiveness in the sourcing and application of available technology, and perhaps effectiveness in the acquisition of productive inputs, organization designs, compensation and incentive system-and just plain better management. 1. Conflict of interest between commercial and investment banking Larger the banks, the greater will be the effects of the failure on the system. Also there is the fear that such institutions, by virtue of their sheer size would gain monopoly power in the market, which can have undesirable consequences for economic efficiency. Further combining commercial and investment banking can give rise to conflict of interest. 10. Sharpening skills The far-reaching changes in the banking and financial sector entail a fundamental shift in the set of skills required in banking. To meet increased competition and manage risk, the demand for specialized banking functions, using IT, as a competitive tool has to go up. Special skills in retail banking, treasury, risk management, foreign exchange, development banking, etc, will need to be carefully nurtured and built. Thus, the twin pillars of the banking sector i.e. human resource and IT will have to be strengthened. Thus the need of the day is a combination of improved technology and quality human resources. 11. Competition Monopolistic competition among universal banks will decrease their profit margin.

12. Government interferences Interferences by government in public sector banks through RBI are hampering progress of universal banks. 13. Present economic recession Recession is affecting universal banks in a big way as their investment in infrastructure as well as the establishment expenses is much higher as compared to public sector banks.

SLR

Definition: Statutory Liquidity Ratio is the amount of liquid assets, such as cash, precious metals or other short-term securities, that a financial institution must maintain in its reserves. The statutory liquidity ratio is a term most commonly used in India Objectives: The objectives of SLR are: 1. To restrict the expansion of bank credit. 2. To augment the investment of the banks in Government securities. 3. To ensure solvency of banks. A reduction of SLR rates looks eminent to support the credit growth in India. The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing it respectively. This counter acts by decreasing or increasing the money supply in the system respectively. Indian banks holdings of government securities (Government securities) are now close to the statutory minimum that banks are required to hold to comply with existing regulation. When measured in rupees, such holdings decreased for the first time in a little less than 40 years (since the nationalisation of banks in 1969) in 2005-06. While the recent credit boom is a key driver of the decline in banks portfolios of G-Sec, other factors have played an important role recently. These include: 1. Interest rate increases. 2. Changes in the prudential regulation of banks investments in G-Sec. Most G-Sec held by banks are long-term fixed-rate bonds, which are sensitive to changes in interest rates. Increasing interest rates have eroded banks income from trading in G-Sec. Recently a huge demand in G-Sec was seen by almost all the banks when RBI released around 108000 crore rupees in the financial system. This was by reducing CRR, SLR & Repo rates. This

was to increase lending by the banks to the corporates and resolve liquidity crisis. Providing economy with the much needed fuel of liquidity to maintain the pace of growth rate. However the exercise became futile with banks being over cautious of lending in highly shaky market conditions. Banks invested almost 70% of this money to rather safe Govt securities than lending it to corporates.

Value and Formula

The quantum is specified as some percentage of the total demand and time liabilities ( i.e. the liabilities of the bank which are payable on demand anytime, and those liabilities which are accruing in one months time due to maturity) of a bank. SLR Rate = Total Demand/Time Liabilities x 100% This percentage is fixed by the Reserve Bank of India. The maximum and minimum limits for the SLR are 40% and 25% respectively.[1] Following the amendment of the Banking regulation Act(1949) in January 2007, the floor rate of 25% for SLR was removed. Presently, the SLR is 25% with effect from 7 November 2009. It was raised from 24% in the RBI policy review on 27 October 2009.

[edit] Difference between SLR & CRR

SLR restricts the banks leverage in pumping more money into the economy. On the other hand, CRR, or Cash Reserve Ratio, is the portion of deposits that the banks have to maintain with the Central Bank. The other difference is that to meet SLR, banks can use cash, gold or approved securities whereas with CRR it has to be only cash. CRR is maintained in cash form with RBI, whereas SLR is maintained in liquid form with banks themselves. SLR
Statutory Liquidity Ratio refers to the amount that the commercial banks require to maintain in the form of cash, or gold or govt. approved securities before providing credit to the customers. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. Statutory Liquidity Ratio or SLR refers to the amount that all banks require maintaining in cash or in the form of Gold or approved securities. Here by approved securities we mean, bond and shares of different companies.

Statutory Liquidity Ratio is determined as percentage of total demand and percentage of time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers on there anytime demand. The liabilities that the banks are liable to pay within one month's time, due to completion of maturity period, are also considered as time liabilities. The maximum limit of SLR is 40% and minimum limit of SLR is 24%. NATIONALISATION OF BANKS IN INDIANationalised Banks in India Nationalised banks dominate the banking system in India. The history of nationalised banks in India dates back to mid-20th century, when Imperial Bank of India was nationalised (under the SBI Act of 1955) and re-christened as State Bank of India (SBI) in July 1955. Then on 19th July 1960, its seven subsidiaries were also nationalised with deposits over 200 crores. These subsidiaries of SBI were State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Indore (SBIR), State Bank of Mysore (SBM), State Bank of Patiala (SBP), State Bank of Saurashtra (SBS), and State Bank of Travancore (SBT). However, the major nationalisation of banks happened in 1969 by the then-Prime Minister Indira Gandhi. The major objective behind nationalisation was to spread banking infrastructure in rural areas and make cheap finance available to Indian farmers. The nationalised 14 major commercial banks were Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Corporation Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Oriental Bank of Commerce (OBC), Punjab and Sind Bank, Punjab National Bank (PNB), Syndicate Bank, UCO Bank, Union Bank of India, United Bank of India (UBI), and Vijaya Bank. In the year 1980, the second phase of nationalisation of Indian banks took place, in which 7 more banks were nationalised with deposits over 200 crores. With this, the Government of India held a control over 91% of the banking industry in India. After the nationalisation of banks there was a huge jump in the deposits and advances with the banks. At present, the State Bank of India is the largest commercial bank of India and is ranked one of the top five banks worldwide. It serves 90 million customers through a network of 9,000 branches. List of Public Sector Banks in India is as follows:

Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank

Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab and Sind Bank Punjab National Bank State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of India (SBI) State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank IDBI Bank

Re: what are nationalised banks? Answer #2

Any private Bank under take by the Government is called Nationalised bank

Re: what are nationalised banks? Answer #3

there are 26 nationalised bank in india.banks which comes under the act of 1970 &1980 of RBI are considered nationalised .........their financial activities are regulated by rbi and govt has certain stake in them ....

Re: what are nationalised banks? Answer #3

there are 26 nationalised bank in india.banks which comes under the act of 1970 &1980 of RBI are considered nationalised .........their financial activities are regulated by rbi and govt has certain stake in them ....

Re: what are nationalised banks? Answer #4

There are 19 nationalised bank in india which comes bank of baroda,allahabad bank,andhra bk,maharashtra bk,canara bk,central bk,corporation bk,dena bk,indian bk,indian oversees,oriental bk,punjab &sindh bk,punjab national bk,sindicate bk,uco bk,united bk,union bk,vijaya bk.

Re: what are nationalised banks? Answer #5

12 nationalized banks in India

Re: what are nationalised banks? Answer #6

At present, there are 19 nationalised banks in India

Re: what are nationalised banks? Answer #7

Nationalised bank are those banks which are governed by the RBI and Regulation act of 1949. The banks which are included are as fallows: 1. Allahabad Bank 2. Andhra Bank 3. Bank of Baroda 4. Bank of India 5. Bank of Maharashtra 6. Canara Bank 7. Central Bank of India 8. Corporation Bank 9. Dena Bank 10. Indian Bank 11. Indian Overseas Bank 12. Oriental Bank of Commerce 13. Punjab and Sind Bank 14. Punjab National Bank 15. State Bank of Bikaner & Jaipur 16. State Bank of Hyderabad 17. State Bank of India (SBI) 18. State Bank of Indore 19. State Bank of Mysore 20. State Bank of Patiala 21. State Bank of Saurashtra 22. State Bank of Travancore 23. Syndicate Bank 24. UCO Bank 25. Union Bank of India 26. United Bank of India 27. Vijaya Bank

Re: what are nationalised banks? Answer #8

Nationalization of banks took place in 1969 in the Indira Gandhi resigm, There are 27 nationalized banks. The purpose was to give more attention to the agricultural n rural needs.

Earlier to 1969 there was only one government bank that was SBI. renationalization took place in 1980.

Re: what are nationalised banks? Answer #8

Nationalization of banks took place in 1969 in the Indira Gandhi resigm, There are 27 nationalized banks. The purpose was to give more attention to the agricultural n rural needs. Earlier to 1969 there was only one government bank that was SBI. renationalization took place in 1980.

Re: what are nationalised banks? Answer #9

there are 20 nationalised bank and 08 state bank group, 26 private bank and 07 foreign bank in india.

Is This Answer Correct ?

13 Yes

42 No

0 Ajit Nayak Re: what are nationalised banks? Answer # 10

there 28 nationalised bank in 2008 IDBI BANK was inculed.

Is This Answer Correct ?

30 Yes

29 No

5 Gayathri Re: what are nationalised banks? Answer # 11

nationalised bank is those bank which is registered by the governament. if that bank fulfil the conditon of banking act.INDRA GHANDHI took a major step for nationalisation of 14 major commercial bank in india according to indian banking act 1949.

Is This Answer Correct ?

10 Yes

12 No

2 Mohsin Khan Re: what are nationalised banks? Answer # 12

Nationalised bank means the capital (amount) is more than the croes and it is undertaking by the resver bank of india is known as nationalised bank.

Is This Answer Correct ?

6 Yes

12 No

Prashanth Re: what are nationalised banks? Answer # 13

The nationlised banks are on which gov take the stake of 51 %.and other are 49%.but it not should be public sector.

Is This Answer Correct ?

4 Yes

14 No

0 Deepika Re: what are nationalised banks? Answer # 14

These are the nationalised banks in India The major objective behind nationalisation was to spread banking infrastructure in rural areas and make cheap finance available to Indian farmers. Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab and Sind Bank Punjab National Bank State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of India (SBI) State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank IDBI Bank

Is This Answer Correct ?

9 Yes

10 No

Friends Re: what are nationalised banks? Answer # 15

there are 19 nationalized banks at present.. new bank of india got merged with punjab national bank.... and state bank of india is not a nationalized bank, it is govt. owned bank not undertaken by govt. of india.

Is This Answer Correct ?

4 Yes

5 No

0 Deepesh Yadav Re: what are nationalised banks? Answer # 16

this whole website is crap. i think you bastards should close down.

Is This Answer Correct ?

6 Yes

13 No

0 Damn Right Handsome Re: what are nationalised banks? Answer # 17

at present their are19 nationalised bank this government have 51% stake in these banks means that

Is This Answer Correct ?

2 Yes

3 No

0 Vama Re: what are nationalised banks? Answer # 18

All state banks

PHASES OF NATONALISATION OF BANKS IN INDIA Befor the steps of nationalisation of Indian banks, only State Bank of India (SBI) was nationalised. It took place in July 1955 under the SBI Act of 1955. Nationalisation of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960. The State Bank of India is India's largest commercial bank and is ranked one of the top five banks worldwide. It serves 90 million customers through a network of 9,000 branches and it offers -- either directly or through subsidiaries -- a wide range of banking services. The second phase of nationalisation of Indian banks took place in the year 1980. Seven more

banks were nationalised with deposits over 200 crores. Till this year, approximately 80% of the banking segment in India were under Government ownership. After the nationalisation of banks in India, the branches of the public sector banks rose to approximately 800% in deposits and advances took a huge jump by 11,000%.

1955 : Nationalisation of State Bank of India. 1959 : Nationalisation of SBI subsidiaries. 1969 : Nationalisation of 14 major banks. 1980 : Nationalisation of seven banks with deposits over 200 crores. BUSINESS CYCLE A business cycle is a sequence of economic activity in a nation's economy that is typically characterized by four phasesrecession, recovery, growth, and declinethat repeat themselves over time. Economists note, however, that complete business cycles vary in length. The duration of business cycles can be anywhere from about two to twelve years, with most cycles averaging about six years in length. In addition, some business analysts have appropriated the business cycle model and terminology to study and explain fluctuations in business inventory and other individual elements of corporate operations. But the term "business cycle" is still primarily associated with larger (regional, national, or industrywide) business trends.

STAGES OF A BUSINESS CYCLE

RECESSION A

recessionalso sometimes referred to as a troughis a period of reduced economic activity in which levels of buying, selling, production, and employment typically diminish. This is the most unwelcome stage of the business cycle for business owners and consumers alike. A particularly severe recession is known as a depression. RECOVERY Also known as an upturn, the recovery stage of the business cycle is the point at which the economy "troughs" out and starts working its way up to better financial footing. GROWTH Economic growth is in essence a period of sustained expansion. Hallmarks of this part of the business cycle include increased consumer confidence, which translates into higher levels of business activity. Because the economy tends to operate at or near full capacity during periods of prosperity, growth periods are also generally accompanied by inflationary pressures. DECLINE Also referred to as a contraction or downturn, a decline basically marks the end of the period of growth in the business cycle. Declines are characterized by decreased levels of consumer purchases (especially of durable goods) and, subsequently, reduced production by businesses.

KEYS TO SUCCESSFUL BUSINESS CYCLE MANAGEMENT

FlexibilityAccording to Gallagher, "part of growth management is a flexible business plan that allows for development times that span the entire cycle and includes alternative recession-resistant funding structures." Long-Term PlanningConsultants encourage small businesses to adopt a moderate stance in their long-range forecasting. Attention to CustomersThis can be an especially important factor for businesses seeking to emerge from an economic downturn. "Staying close to the customers is a tough discipline to maintain in good times, but it is especially crucial coming out of bad times," stated Arthur Daltas in Industry Week. "Your customer is the best test of when your own upturn will arrive. Customers, especially industrial and commercial ones, can give you early indications of their interest in placing large orders in coming months." ObjectivitySmall business owners need to maintain a high level of objectivity when riding business cycles. Operational decisions based on hopes and desires rather than a sober examination of the facts can devastate a business, especially in economic down periods. Study"Timing any action for an upturn is tricky, and the consequences of being early or late are serious," said Daltas. "For example, expanding a sales force when the markets don't materialize not only places big demands on working capital, but also makes it hard to sustain the motivation of the sales-people. If the force is improved too late, the cost is decreased market share or decreased quality of the customer base. How does the company strike the right balance between being early or late? Listening to economists, politicians, and media to get a sense of what is happening is useful, but it is unwise to rely solely on their sources. The best route is to avoid trying to predict the upturn. Instead, listen to your customers and know your own response-time requirements." DIFFERENCE B/W COMMERCIAL BANKS AND DEVELOPMENT BANKS

A commercial bank is targeting the masses. It has a number of products to market in a day to day routine. On the other hand, A development bank is focused on the developing sector only. They provide micro-loans, agriculture loans and other such development products.

Commercial banks for day to day financial transactions of an individual, group or a company. Development banks for loans for development activities housing, commercial, agricultural etc.,

A commercial bank is targeting the masses. It have a number of products to market in a daylight to day routine. On the other hand, A development dune is focused on the developing sector only. They provide micro-loans, agriculture loans and other such development products.

Commercial banks are private owned and inside bank is government owned.
InvestorWords.com

interest rate
Definition A rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates often change as a result of inflation and Federal Reserve policies. For example, if a lender (such as a bank) charges a customer $90 in a year on a loan of $1000, then the interest rate would be 90/1000 *100% = 9%. INTERNATIONAL BUSINESS
The economic system of exchanging good and services, conducted between individuals and businesses in multiple countries. 2. The specific entities, such as multinational corporations (MNCs) and international business companies (IBCs), which engage in business between multiple countries.