MASTER OF BUSINESS ADMINISTRATION-SEMESTER 4

TREASURY MANAGEMENT

SUBJECT CODE –MF0016 4th semester

Q1 Explain how organisation structure of commercial bank treasury facilitates in handling various treasury operations.

Answer :- The treasury organisation deals with analysing, planning, and implementing

treasury functions. It deals with issues of profit centre, cost centre etc. The organisation

managing interfaces with treasury functions include intra group communications, taxation,

recharging, measurement and cultural aspects.

Structure of treasury organisation.

Figure depicts the structure of treasury organisation which is divided into five groups.

Figure : Treasury Organisations

Fiscal – This group includes budget policy planning division, industrial and

environmental division, common wealth state relationships, and social policy division.

Macroeconomic – This group deals with economic sector of the organisation. It

includes domestic and international economic divisions, macroeconomic policy and

modelling division.

Revenue – This group is concerned with the taxes in an organisation. It includes

business tax division, indirect tax, international and treaties division, personal and

income division, tax analysis and tax design division.

Markets – This group mainly deals with selling of products in the competitive market.

It includes competition and consumer policy, corporations and financial services

policy, foreign investments and trade policy division.

Corporate services – This group deals with overall management of the treasury

organisation. It includes financial and facilities division, human resource division,

business solutions and information management division.

Treasury management in banks

In recent days, most of the Indian banks have classified their business into two primary

business segments like treasury operations (investments) and banking operations (excluding

treasury).

The treasury operations in banks are divided into:

Rupee treasury – The rupee treasury carries out various rupee based treasury functions

like asset liability management, investments and trading. It helps in managing the

bank’s position in terms of statutory requirements like cash reserve ratio, statutory

liquidity ratio according to the norms of the Reserve Bank of India (RBI). The various

products in rupee treasury are:

Money market instrument- Call, term, and notice money, commercial papers, treasury bonds,

repo, reverse repo and interbank participation etc.

Bonds – Government securities, debentures etc

Equities

Foreign exchange treasury – The banks provide trading of currencies across the globe.

It deals with buying and selling currencies.

Derivatives – The banks make foundation for Over the Counter (OTC). It helps in

developing new products, trading in order to lay off risks and form apparatus for

much of the industry’s self-regulation.

The role of policies in strategic management was described in this section. The next section

deals with inter-dependency between policy and strategy.

Q2 Bring out in a table format the features of certificate of deposits and commercial papers.

Answer : commercial papers is a type of instrument in money market and it was introduced in jan 1990. Commercial paper is a short term unsecured promissory note issued by large corporations. They are issued in bearer forms in a discount to face value. It is issued by the corporations to raise funds for a short term.

The salient features of commercial papers are as follows:

1. They are negotiable by endorsement and delivery and hence they are flexible as well as liquid instruments. Commercial paper can be issued with varying maturities as required by the issuing company.

2. They are unsecured instruments as they are not backed by any assets of the company which is issuing the commercial paper.

3. They can be sold either directly by the issuing company to the investors or else issuer can sell it to the dealer who in turn will sell it into the market.

4. It helps the highly rated company in the sense they can get cheaper funds from commercial paper rather than borrowing from the banks.

However use of commercial paper is limited to only blue chip companies and from the point of view of investors though commercial paper provides higher returns for him they are

unsecured and hence investor should invest in commercial paper according to his risk -return profile.

CPs is an unsecured for a maturity period of 15 days to less than one year. CPs is issued in the denomination of Rs 5 lakhs. The minimum size of the issue is Rs

25 lakhs. The ceiling amount of CPs should not exceed the working capital of the issuing

company. The investors in CPs market are banks, individuals, business organisations and the

corporate units registered in india and incorporated units. The interest rate of CPs depends on the prevailing interest rate on CPs market, forex

market and call money market. The attractive rate of interest in any of this markets, affects the demand of CPs

The eligibility criteria for the companies to issue CPs are as follows:The tangible worth of the issuing company should not be less than Rs 4.5 crores.The company should have a minimum credit rating of P2 and A2 obtained from credit rating information services of india(CRISIL) and investment information and credit rating agency of india limited(ICRA) respectively.The current ratio of the issuing company should be 1.33:1The issuing company has to be listed on stock exchange.

Features of certificate of deposits in Indian market

The characteristics features of CDs in Indian money market are as follows:

Deal in Money Market Only

There are two main market for getting fund for company. One is money market and other is

capital market. In capital market, we issue the shares and stocks. People come and buy the

same. When they need money they also sell these shares. But in money market, short term

money needs are fulfilled. Bank can issue a certificate of deposits and get money from public.

It is just like one or two years FD. But in the FD, people request. But in a certificate of

deposits, bank has to request through advertising in news or online way.

Using of Ladders Facility in CDs

We can use ladders facility in CDs. It is useful from investor point of view. In this ladders

facility, investor does not invest his all money in one type of CDs, he invests step by step.

First of all he invest in very short period CDs. After this, he collects its money from it and

invest in the CDs who have good rate of interest. By taking ladders facility, you can

easily reinvest your received interest in previous CDs.

Schedule banks are eligible to issue CDs Maturity period stands varies from three months to one year. Banks are not permitted to buy back their CDs before the maturity. CD are subjected to CRR and statutory liquidity ratio(SLR) requirements. They are freely transferable by endorsement and delivery. They have no lock in

period. CDs have to bear stamp duty at the prevailing rate in the markets. The RNIs can subscribed to CDs on repatriation basis.

Certificate of deposits is considered as risk-less because default risk in them is almost negligible and hence its safe bet for investors.

Certificate of deposits is highly liquid and marketable and hence investors can buy or sell it whenever they desire to do so.

They are transferable from one party to another which cannot be done with term deposits and hence it is an added advantage for investors who are willing to invest in it.

It is a time deposit that restricts holders from withdrawing funds on demand, however if an investor wants to withdraw the money, this action will often incur a penalty.

A certificate of deposits may be payable to the bearer or registered in the name of the investor. Most certificates of deposits are issued in bearer form because investors can resell bearer CD’s more easily than registered CD’s.

Hence from the above one can see that certificate of deposits can be one of the alternatives for a investor if he or she does not want to invest in term deposits.

Q3 Critically evaluate participatory notes. Detail the regulatory aspects on it.

Answer : international entrance to Indian capital market is limited to foreign institutional

investors(FIIs) the market has found a way to avoid the limitation by creating an instrument

called participatory notes(PNs).PNs are basically contract notes. Indian traders by securities

and then issue PN to foreign investors. Any dividends or capital gains collected from the

primary securities are returned back to the investors. Any entity investing in PNs may not

register with SEBI whereas all FIIs have to register compulsorily. Since international access

to the Indian capital market is limited to FIIs. The market has found a way to circumvent this

by creating the device called participatory notes, which are said to account for half the $80

billion that stands to the credit of FIIs. Investing through P-Notes is very simple and hence

very popular.

P-Notes are issued to the real investors on the basis of stocks purchased by the FII. The registered FII looks after all the transactions, which appear as proprietary trades in its

books. It is not obligatory for the FIIs to disclose their client details to the Sebi, unless asked specifically

FIIs who issue/renew/cancel/redeem P-Notes, are required to report on a monthly basis. The

report should reach the Sebi by the 7th day of the following month.

The FII merely investing/subscribing in/to the Participatory Notes -- or any such type of

instruments/securities -- with underlying Indian market securities are required to report on

quarterly basis (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec).

FIIs who do not issue PNs but have trades/holds Indian securities during the reporting quarter

(Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec) require to submit 'Nil' undertaking on a quarterly

basis.

FIIs who do not issue PNs and do not have trades/ holdings in Indian securities during the

reporting quarter. (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec): No reports required for that

reporting quarter

Any entity incorporated in a jurisdiction that requires filing of constitutional and/or other

documents with a registrar of companies or comparable regulatory agency or body under the

applicable companies legislation in that jurisdiction;

b) Any entity that is regulated, authorised or supervised by a central bank, such as the Bank

of England, the Federal Reserve, the Hong Kong Monetary Authority, the Monetary

Authority of Singapore or any other similar body provided that the entity must not only be

authorised but also be regulated by the aforesaid regulatory bodies;

c) Any entity that is regulated, authorised or supervised by a securities or futures commission,

such as the Financial Services Authority (UK), the Securities and Exchange Commission, the

Commodities Futures Trading Commission, the Securities and Futures Commission (Hong

Kong or Taiwan), Australia Securities and Investments Commission (Australia) or other

securities or futures authority or commission in any country , state or territory;

d) Any entity that is a member of securities or futures exchanges such as the New York Stock

Exchange (Sub-account), London Stock Exchange (UK), Tokyo Stock Exchange (Japan ),

NASD (Sub-account) or other similar self-regulatory securities or futures authority or

commission within any country, state or territory provided that the aforesaid organizations

which are in the nature of self regulatory organizations are ultimately accountable to the

respective securities / financial market regulators.

e) Any individual or entity (such as fund, trust, collective investment scheme, Investment

Company or limited partnership) whose investment advisory function is managed by an entity

satisfying the criteria of (a), (b), (c) or (d) above.

However, Indian regulators are not very happy about participatory notes because they have

no way to know who owns the underlying securities. Regulators fear that hedge funds acting

through participatory notes will cause economic volatility in India's exchanges.

Hedge funds were largely blamed for the sudden sharp falls in indices. Unlike FIIs, hedge

funds are not directly registered with Sebi, but they can operate through sub-accounts with

FIIs. These funds are also said to operate through the issuance of participatory notes.

30% FII money in stocks thru P-Notes

According to one estimate, more than 30 per cent of foreign institutional money coming into

India is from hedge funds. This has led Sebi to keep a close watch on FII transactions, and

especially hedge funds.

Hedge funds, which thrive on arbitrage opportunities, rarely hold a stock for a long time.

With a view to monitoring investments through participatory notes, Sebi had decided that

FIIs must report details of these instruments along with the names of their holders.

t the proposals were against PNs but not against FIIs. The procedures for registering FIIs

were in fact being simplified, he said.

Sebi has also proposed a ban on all PN issuances by sub-accounts of FIIs with immediate

effect. They also will be required to wind up the current position over 18 months, during

which period the capital markets regulator will review the position from time to time.

t the amount of foreign investment coming in through participatory notes keeps changing and

is somewhere between 25-30 per cent. "Recent indications are that it has gone up a little but

again after the sub-prime crisis, there have been some exits. But it's a fairly significant

percentage, it's not something you can ignore."

When asked if he was comfortable with almost one-fourth of the  market being held by P-

Notes, he said that he wasn't 'entirely uncomfortable.'

a column by Niranjan Rajadhyaksha that deals with the issues relating to regulation of complex financial instruments such as participatory notes that are held by investors like hedge funds. Referring to the classic debate between public regulation and market regulation, he states:

“Regulators have two options: to demand more clarity on what is going on or to clamp down on financial innovation. The former is quite clearly the more sensible option. Bans never help, although there are the inevitable calls for them whenever there are problems in the financial markets. Usually, crises in the real economy bring with them calls for further deregulation while crises in the financial economy come with calls for tighter regulation: That’s a big paradox in the annals of contemporary policy debate.

All this is of relevance to India. The domestic financial markets are still repressed. Local

investors have access to a limited range of securities to buy and sell. But the same cannot be said of offshore investors who are taking positions on the Indian economy—either directly or indirectly. Many of them are hedge funds who use a range of trading strategies. They buy into the India story through participatory notes (PNs), which are offshore instruments backed by Indian equities and derivatives and whose proliferation has kept troubling the Reserve Bank of India and the Securities And Exchange Board of India (Sebi).”

He also cites an IMF Working Paper by Manmohan Singh that traces the use of participatory notes in the Indian financial markets, and concludes with the impact of the regulatory pronouncements issued by SEBI in October 2007. The abstract of the paper runs as follows:

“This paper focuses on the use of participatory notes (PNs) by foreign investors, as a conduit for portfolio flows into Indian equity markets for more than a decade. The broadening of India's foreign investor base, in recent years, has a bias towards hedge funds/unregistered foreign investors who invest primarily via PNs. While tax arbitrage via capital gains tax has almost disappeared since July 2004, it is intriguing to note that since then the demand for PNs has actually increased. The paper suggests some reasons for the continuation of a buoyant market in PNs, and explains the possible impact from the recent regulatory changes.”SEBI’s October 2007 pronouncements can be found here and here. Essentially, they bar foreign institutional investors (FIIs) from issuing PNs on derivatives and require them to wind-down their existing positions within 18 months. As far as PNs for cash are concerned, they are permitted up to a maximum of 40% of the assets under custody (AUC) of the FIIs. Manmohan Singh concludes as follows:

“SEBI’s ban on the issuance of PNs on derivatives will reshuffle the investor base on portfolio inflows. Its proposal may increase the inflows onshore by the apparent interest from real money accounts to register onshore (including pension, endowments, charitable trusts etc); however, inflows from margin accounts (i.e., from investors who use PNs on derivatives) are likely to disappear along with some investors from the PN cash market. Inflows from PNs on derivatives will not be replaced since this route allowed transactions that cannot be mimicked onshore. The near-term impact depends on how staggered the unwinding is likely to be. Once the reshuffling of the investor base in favor of the real money account takes place over the next 18 months, capital flows are likely to be more stable.”

Although SEBI’s pronouncements are likely to cause churn in FII investments during the 18-month period and possibly disrupt investment flows, the regulator’s action is a unique step toward investor regulation and enhanced transparency. While economies like the US are still grappling with the issue of whether to regulate hedge funds and other similar investors, India has taken the step of imposing stringent regulations by requiring hedge funds and other PN holders to register directly with SEBI rather than use conduits such as PNs to avoid registration requirements.

The benefits of PNs are as follows:

Entities route their investment through PN to extract advantage of the tax laws system.

It provide a high degree of secrecy, which enables large funds to carry out their operations without revealing their identity.

Investors used PNs to enter Indian market and shift to fully fledged FII structure when they are established.

Q4 What is capital account convertibility? What are the implications on implementing CAC?

Answer: capital accounts convertibility refers to relaxing controls on capital account transactions. It means freedom of currency conversion in terms of inflow and outflow with respect to capital account transaction. Most the countries have liberalised their capital account by having an open account but they do retain some operations for influencing inward and outward capital flow. Due to global integration, both in trade and finance, CAC enhances growth and welfare of country. It refers to the abolition of all limitations with respect to the movement of capital from India to different countries across the globe. In fact, the authorities officially involved with CAC (Capital Account Convertibility) for Indian Economy encourage all companies, commercial entities and individual countrymen for investments, divestments, and real estate transactions in India as well as abroad. It also allows the people and companies not only to convert one currency to the other, but also free cross-border movement of those currencies, without the interventions of the law of the country concerned.

The perception of CAC has undergone some changes following the events of emerging market economies(EMEs) in asia and latin America, which went through currency and banking crisis in 1990. A few countries backtracked and re imposed capital controls as part of crisis resolution . crisis such as economics, social, human cost and even extensive presence of capital controls creates distortions ,making CAC either ineffective or unsustainable. The cost and benefits from capital accounts liberalisation is still being debated among academics and policy makers. These developments have led to considerable caution being exercised by EMEs in opening up capital accounts. The committee on capital accounts convertibility which submitted its report in 1997 highlighted the benefits of a more open capital accounts but at the same time cautioned that CAC could post tremendous pressures on the financial systems. India has cautiously opened its capital accounts and the state of capital control in india is considered as the most liberalised it had been since late 1950’s. The different ways of implementing CAC are as follows:

Open the capital account for residents and non residents.

Initial open the inflow account and later liberalise the outflow account.

Approach to simultaneous liberalise control of inflow and outflow account.

ON the inaugural function of the 16th Asian Corporate Conference (March 18, 2006), the prime minister Dr Manmohan Singh, stated that there is merit in India’s moving forward towards fuller Capital Account Convertibility. In an immediate response, the RBI set up a committee under the Chairmanship of Mr S S Tarapore to pave the way for the Capital Account Convertibility. This article provides a basic analysis of the problems involved with the issue of Capital Account Convertibility in India.  

In India, the foreign exchange transactions (transactions in dollars, pounds, or any other currency) are broadly classified into two accounts: current account transactions and capital account transactions. If an Indian citizen needs foreign exchange of smaller amounts, say $3,000, for travelling abroad or for educational purposes, she/he can obtain the same from a bank or a money-changer. This is a “current account transaction”. But, if someone wants to import plant and machinery or invest abroad, and needs a large amount of foreign exchange, say $1 million, the importer will have to first obtain the permission of the Reserve Bank of India (RBI). If approved, this becomes a “capital account transaction”. This means that any domestic or foreign investor has to seek the permission from a regulatory authority, like the RBI, before carrying out any financial transactions or change of ownership of assets that comes under the capital account. Of course there are a whole range of financial transactions on the capital account that may be freed form such restrictions, as is the case in India today. But this is still not the same as full capital account convertibility.   By “Capital Account Convertibility” (or CAC in short), we mean “the freedom to convert the local financial assets into foreign financial assets and vice-versa at market determined rates of exchange. It is associated with the changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by the rest of the world. …” (Report of the Committee on Capital Account Convertibility, RBI, 1997) Thus, in simpler terms, it means that irrespective of whether one is a resident or non-resident of India one’s assets and liabilities can be freely (i.e. without permission of any regulatory authority) denominated (or cashed) in any currency and easily interchanged between that currency and the Rupee.   PROBLEMS WITH CAC Several economists are of the view that the full Capital Account Convertibility (and allowing the exchange rate to be market determined) has serious consequences on the wellbeing of the country, and this may even lead to extreme sufferings of the common masses. Some of the reasons are highlighted below. During the good years of the economy, it might experience huge inflows of foreign capital, but during the bad times there will be an enormous outflow of capital under “herd behaviour” (refers to a phenomenon where investors acts as “herds”, i.e. if one moves out, others follow immediately). For example, the South East Asian countries received US$ 94 billion in 1996 and another US$ 70 billion in the first half of 1997. However, under the threat of the crisis, US$ 102 billion flowed out from the region in the second half of 1997, thereby accentuating the crisis. This has serious impact on the economy as a whole, and can even lead to an economic crisis as in South-East Asia. There arises the possibility of misallocation of capital inflows. Such capital inflows may fund low-quality domestic investments, like investments in the stock markets or real estates, and desist from investing in building up industries and factories, which leads to more capacity creation and utilisation, and increased level of employment. This also reduces the potential of the country to increase exports and thus creates external imbalances. An open capital account can lead to “the export of domestic savings” (the rich can convert their savings into dollars or pounds in foreign banks or even assets in foreign countries), which for capital scarce developing countries would curb domestic investment. Moreover, under the threat of a crisis, the domestic savings too might leave the country along with the foreign ‘investments’, thereby rendering the government helpless to counter the threat. Entry of foreign banks can create an unequal playing field, whereby foreign banks “cherry-pick” the most creditworthy borrowers and depositors. This aggravates the problem of the farmers and the small-scale industrialists, who are not considered to be credit-worthy by these banks. In order to remain competitive, the domestic banks too refuse to lend to these sectors, or

demand to raise interest rates to more “competitive” levels from the ‘subsidised’ rates usually followed. International finance capital today is “highly volatile”, i.e. it shifts from country to country in search of higher speculative returns. In this process, it has led to economic crisis in numerous developing countries. Such finance capital is referred to as “hot money” in today’s context. Full capital account convertibility exposes an economy to extreme volatility on account of “hot money” flows. The class which benefits from the CAC primarily compromises the big business houses and the finance capitalists, who invest in the stock market for speculations. The policies like CAC are pursued mainly to gain the confidence of the speculators and punters in the Stock Markets, and do not have any beneficial effects on the real sector of the economy, like increasing the employment level, eliminating poverty and decreasing the inequality gap. However, the irony is that under a crisis, the burden is borne primarily by the common masses. This may come in the form of a sharper reduction in subsidies, less investment for social welfare projects by the government and an increase in the privatisation process. The foreign speculators and the domestic players may walk out of the market (by converting their assets to foreign currency) and insulate themselves from any damage.  

Q5 detailed domestics and international cash management systems.

Answer: Maintaining the channels of collections and accounting information efficiently has become essential with growth in business transaction sections. This includes enabling greater connectivity to internal corporate systems and providing better IT solutions and services in cash management. A cash management systems is a company’s strategy which includes sustainable investment practices to enhance the collection of receivables, control payments to trade creditors and efficiently manage the liquidity margin. CMS involves hiring a debt collection service to recover the borrowed property by a customer ,depositing cash into a lock box to ensure its protection. The objectives of cash management system are to bring the company’s cash resources within control in an efficient manner and to achieve the optimum conservation and utilisation of the funds.

Multinational cash management

The strategy of a company which has its businesses in many nations and efficiently manages its cash and liquidity is called multinational cash management programme. The main goal of multinational cash management is the utilisation of local banking and cash management services.

Multinational companies are those that operates in two or more countries. Decision making within the corporation is centralised in the home country or decentralised across the countries where the organisation does its business.

The reason for which the firm expand into other countries are as follows:

Seeking new raw markets and raw materials. Seeking new technology and products efficiency. Preventing the regulatory obstacles.

Retaining customers and protecting its processes. Expanding its business.

Several factors which distinguish multinational cash management from domestic cash management are as follows:

Different currency denominations. Political risk and other risk. Economic and legal complications. Role of governments. Language and cultural differences. Difference in tax rates, import duties.

The principal objectives of multinational cash management programme is to maximise a company’s financial resources by taking benefits from all liability provisions, payable periods. The multinational cash management programme effectively achieve its goals by using excess cash flows from some units across the globe to extend cash needs in other units which is called in house banking and by relocating funds for tax and foreign exchange management through re pricing and invoicing.

During multinational cash management system payments by customers to company’s branches are basically handled through a local bank. The payment between the branches and the parent company are managed through the branches, correspondents or associates of the parent company

The multinational cash management cash management system involves exchange rate risk which occurs when the cash flow of one currency during transformation to another currency the cash value gets declined. It occurs due to the change in exchange rates. The exchange rates are determined by a structure which is called the international monetary system.

Q6. Distinguised between CRR and SLR.

Answer: cash reserve ratio is a country’s central bank regulation that sets the minimum reserves for banks to hold for their customer deposits and notes. These reserves are considered to meet the withdrawal demands of the customers. The reserves are in the form of authorised currency stored in a bank treasury or with the central bank . CRR is also called liquidity ratio as it controls money supply in the economy .CRR is occasionally used as a tool in monetary policies that influence the country’s economy.

CRR in india is the amount of funds that a bank has to keep with the RBI which is the central bank of the country .if CRR decides to increase CRR , then the banks available cash drops. RBI practice this method this is increase CRR to drain out excessive money from banks.

Statutory liquidity ratio: it is the percentage of total deposits that banks have to invest in government bonds and other approved securities. It means the percentage of demand and time maturities that banks needs to have in forms of cash, gold and securities like government

securities. As gold and government securities are highly liquid and safe assets they are included along with cash.

In india RBI determines the percentage of SLR. There are some statutory requirements for placing the money in the government bonds. After following the requirements, the RBI arrange the level of SLR. The maximum limit of SLR is 40 percent and minimum limit of SLR is 25 percent. The RBI increases the SLR to control inflation, extra liquidity in the market and protects customers money . increase the SLR also limits the banks leverage position to drive more money into the economy.

If any Indian bank fails to maintain the required level of SLR then it is penalised by RBI. The non payer bank pays an interest as penalty which is above the actual bank rate.

The main objectives for maintaining SLR are the following:

By exchanging the SLR level, the RBI increases or decreases banks credit expansion. Ensures the comfort of commercial banks. Forces the commercial banks to invest in government securities like government

bonds.

CRR

CRR stands for Cash Reserve Ratio, and specifies in percentage the money commercial banks need to keep with themselves in the form of cash. In reality, banks deposit this amount with RBI instead of keeping this money with them. This ratio is calculated by RBI, and it is in the jurisdiction of the apex bank to keep it high or low depending upon the cash flow in the economy. RBI makes judicious use of this amazing tool to either drain excess liquidity from the economy or pump in money if so required. When RBI lowers CRR, it allows banks to have surplus money that they can lend to invest anywhere they want. On the other hand, a higher CRR means banks have lesser amount of money at their disposal to distribute. This serves as a measure to control inflationary forces in economy. Present rate of CRR is 5%.

SLR

It stands for Statutory Liquidity Ratio and is prescribed by RBI as a ratio of cash deposits that banks have to maintain in the form of gold, cash, and other securities approved by RBI. This is done by RBI to regulate growth of credit in India. These are un-encumbered securities that a bank has to purchase with its cash reserves. The present SLR is 24%, but RBI has the power to increase it up to 40% ,if it so deems fit in the interest of the economy.

• Both CRR and SLR are instruments in the hands of RBI to regulate money supply in the hands of banks that they can pump in economy

• CRR is cash reserve ratio that stipulates the percentage of money or cash that banks are required to keep with RBI

• SLR is statutory liquidity ratio and specifies the percentage of money a bank has to maintain in the form of cash, gold, and other approved securities

• CRR controls liquidity in economy while SLR regulates credit growth in the country

• While banks themselves maintain SLR in liquid form, CRR is with RBI maintained as cash.