Example of CRR and SLR maintenance:

Banks maintain CRR on a fortnightly average basis.

Say, a bank has NDTL of 100 crores and CRR is 4%.

The bank will thus have to maintain 4 crores as cash balance in its account with RBI. This 5
crores is calculated on a fortnightly average basis and the exact modality of how this is done is
explained below.

Reporting Friday and Reporting Fortnight

To understand how this fortnightly average system works, we need to first understand the
concept of reporting fortnight and reporting Friday.

Every alternate Friday is a reporting Friday. For example, March 23, 2012 was a reporting
Friday. So the next reporting Fridays would fall on April, 6, April 20, May 4 and so on. In case
the reporting friday happens to be a holiday, the last previous working day is taken as the
relevant reporting friday.

The 14 day period beginning on the Saturday immediately following a reporting Friday is called
a reporting fortnight. A reporting fortnight therefore begins on a Saturday and ends on the
reporting Friday.

As the name would suggest, banks report their business numbers (deposits, advances,
investments etc.) to RBI as on these reporting Fridays.

For purposes of maintaining CRR and SLR, banks have to calculate their NDTL on every
reporting friday.

However, the actual CRR and SLR maintenance happens with a lag of one fortnight.

So if the NDTL of a bank was 100 crores on March 9, 2012 and (assuming CRR is 4%) the bank
would have to maintain an average cash balance of 4 crores in the reporting fortnight which
begins on March 24.

This reporting and maintenance cycle is repeated over.

The situation can be better understood in the depiction below

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Assume A, B and C are dates on a timeline that fall on alternating Fridays. Also, let’s say these
are reporting Fridays.

Let’s also say that a bank calculates its NDTL on A and it turns out that the NDTL is equal to
100 crores.

If the CRR is 4%, the bank has to maintain an average cash balance of 4 crores over a fortnight.
However, banks are given one fortnight’s time before they start maintaining these CRR balances.

So, for NDTL of 100 crores on A, the bank would have to maintain an average cash balance of 4
crores during the reporting fortnight ‘BC’.

To implement this, banks maintain CRR by the fortnightly product method.

Once again, it is easier to understand this with an example.

Let’s take our previous example:

If the bank has to maintain 4 crores on an average over the fortnight (14 days) it effectively has
to maintain a product of

4 x 14 = 56 crores

Banks also have to maintain at least 70% of their stipulated CRR average as cash balance with
RBI on every day of the reporting fortnight. This means that the bank in our example has to
maintain

0.70 x 4 = 2.8 crores as cash balance on every day of the fortnight.

Let’s say for e.g. that the bank maintains the following cash balances on the first seven days of
the fortnight.

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  Day 1 : 4 crores
 Day 2 : 4.5 crores
 Day 3 : 3.5 crores
 Day 4 : 7 Crores
 Day 5 : 6 crores
 Day 6 : 5.5 crores
 Day 7 : 6.5 crores

Effectively the bank has maintained a product of

4 + 4.5 + 3.5 + 7 + 6 + 5.5 + 6.5 = 37 crores in the first 7 days.

(To calculate the product we multiply the amount maintained by the number of days the amount
is maintained as balance. Since we are taking daily amounts we simply multiply the amounts by
a factor of 1)

This means that the bank now needs to maintain only 56-37 = 19 crores as product in the
second week of the reporting fortnight.

The minimum 70% stipulation means that banks can maintain neither too low a cash balance nor
too high a cash balance on every day of the fortnight. If they maintain too high a cash balance
during the initial days of the fortnight, it may so happen that the product build up is rapid and the
bank may need to maintain a significantly lower cash balance during the last few days of the
fortnight. This condition could lead to a breach of the minimum 70% rule which could incur
penalties.

Banks thus have to be diligent in the calculation and maintenance of their fortnightly product.

Until this 70% rule was brought in sometime in 2002, banks were free to maintain any amounts,
with the result that volatility in the money market was high, as banks’ requirement of funds
varied sharply depending on their product build up during the reporting fortnight.

Penalties

From the fortnight beginning June 24, 2006, penal interest will be charged as under

In case of default in maintenance of CRR requirement on a daily basis which is presently 70 per
cent of the total CRR requirement, penal interest will be recovered for that day at the rate of:

Bank Rate + 3% per annum on the amount by which the cash balance actually maintained falls
short of the prescribed minimum on that day.

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If the shortfall continues on the next succeeding day/s, the penal interest levied is at the rate
Bank Rate + 5% per annum.

In cases of default in maintenance of CRR on average basis during a fortnight, penal interest will
be recovered as envisaged in sub-section (3) of Section 42 of Reserve Bank of India Act, 1934.
Under this section,The penal interest for default is:

if the average daily balance held at RBI by a bank during any fortnight is below the required
average balance for CRR purposes, penal interest will be charged at the rate of

Bank Rate + 3% per annum

on the amount by which the balance falls short of the requirement.

If during the next succeeding fortnight the daily average balance is still below the required
amount, the penal interest liable to be charged is

Bank Rate + 5% per annum

for each subsequent fortnight during which the bank defaults on maintaining the minimum
required balance.

In addition to the above if the default on maintaining CRR continues for more than two
fortnights meaning then any director, manager or secretary who knowingly and wilfully is a
party to such defaults are liable to be fined a princely sum of five hundred rupees for every
fortnight where such default occurs.

More tellingly if such a default on CRR continues for more than two fortnights, RBI has the
power to prohibit the bank from accepting any fresh deposit.

SLR Maintenance

As has been discussed above, SLR is that proportion of NDTL that the bank has to maintain in
certain specified assets.

It should be noted that for SLR purposes NDTL is calculated slightly differently.

Firstly, all inter bank liabilities and assets are to be included for SLR purposes (unlike CRR
wherein liabilities with original maturity between 15 days and one year were excluded)

Secondly, there are no exemptions (items on which no SLR is to be maintained) – unlike CRR
where some items are exempt.

Specified Investments

The specified investments that are eligible for SLR purposes are

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  Cash
 Gold valued at a price not exceeding the current market price
 Investment in the following instruments which will be referred to as “Statutory
 Liquidity Ratio (SLR) securities”:
 Dated government of india securities
 Treasury Bills of the Government of India;
 State Development Loans (SDLs) of the State Governments issued from time to time
under the market borrowing programme; and
 Any other instrument as may be notified by the Reserve Bank of India.

Of the above, any securities which are encumbered in any way can not be included for SLR
purposes. This also includes situations wherein the security may have been submitted to RBI as
collateral under the daily liquidity adjustment facility (the commonly understood RBI repo
window).

Unlike CRR which is maintained as an average over the entire fortnight, SLR has to be
maintained on all the days of the relevant fortnight.

The relevant fortnight and NDTL are however the same as in the case of CRR.

SLR is therefore maintained on the NDTL as on the reporting Friday of two fortnights ago.(just
like in the case of CRR).

Penalties

If a bank fails to maintain the required amount of SLR, it shall be liable to pay to RBI in respect
of that default, penal interest for that day at the rate of three per cent per annum above the
Bank Rate on the shortfall.

If the default continues on the next succeeding working day, the penal interest may be increased
to a rate of five per cent per annum above the Bank Rate for the concerned days of default on
the shortfall.