Welcome to Banking Quest

Introduction

• Maintenance of CRR 
• Investment in SLR securities.
• Money Market.
• Call/Notice Money 
• Term Money Market 
• Treasury Bill

 Cash Reserve Ratio (CRR)

• Section 42(1) of the RBI Act, 1934, empowers RBI to stipulate CRR on the SCBs without any floor or ceiling rate. 
• Effective February 09, 2013, the CRR is prescribed by RBI at 4.00% of a bank's total of NDTL (consisting of demand, time and other liabilities of the bank).
• During the Covid Pandemic period it was reduced to 3% but again brought back  to 4% from 22/05/21
• In case banks are not able to keep 4% on a daily basis for a fortnight, they can keep 90% of 4% on some days subject to the fact that the overall average should be 4% for the fortnight.

Procedure for Computation of CRR : Normally a month consists of two fortnights. Since it may take time for banks to collect the details from the branches, RBI has instructed the banks to keep the CRR with a lag of one fortnight, i.e., first fortnight CRR figures has to be maintained in II fortnight and second fortnight figures have to maintained in the subsequent first fortnight. 

• No Interest Payment on Eligible Cash Balances maintained by SCBs with  RBI under CRR from 3103/2007.
• From the fortnight beginning June 24, 2006, penal interest is charged as under in cases of default in maintenance of CRR by SCBs. 
• 1st default in a fortnight – 3% over Bank Rate on the shortfall amount.
• Any subsequent default in the fortnight – 5% over Bank Rate on the shortfall amount.

Why is the CRR imposed by Central Banks all over the world?

• CRR is used by the Central Banks to:
• Regulate liquidity
• Control inflation.

If liquidity in the economy comes down heavily, then RBI will reduce the CRR.

• • • How to define inflation?
    • The purchasing power of our currency is falling.
    • How inflation is controlled through CRR?
    • Inflation raising scenario:
    • Velocity of money in the economy and it is also called circulation of money in the economy:
    • Broad money supply – the indicator for this in India is M3.
• Under inflation raising scenarios, banks are giving loans more.  Higher the loans, higher the purchasing power in the hands of the public.
• When supply is limited and the purchasing power of the public goes up, it creates more inflation. This concept is called Demand-Pull Inflation.
• How will RBI control demand pull inflation?

Direct Measure:

• Increase CRR, so that Banks have to keep more amount with RBI and with the result, the loanable funds with the Banks come down.
• In the same way, if inflation falls below the benchmark of the Central Bank, it can lead to a recessionary trend in the economy. 
• So, RBI reduces the CRR so that the loanable funds in the hands of the commercial banks goes and they can give more loans, which would lead to more money circulation (M3) at the hands of the consumers. 

What are the three Trinities (domestic) of RBI?

• Growth, Inflation and Unemployment:
  • Higher the growth, higher the inflation and lower the unemployment
  • Lesser the growth, lesser the inflation and higher the unemployment.
• For countries like India, a reasonable dose (moderate) of inflation is required. Why?
• Government & RBI have jointly decided to have an inflation level of 4% (CPI) with standard deviation of + or – 2% over 4%.

Statutory Liquidity Ratio (SLR)
RBI gets power to impose SLR on the Banks as per  Section 24 of the Banking Regulation Act, 1949 through the Banking Regulation (Amendment) Act, 2007.

• RBI has powers to increase the SLR upto 40% of NDTL of the Banks. Presently it is at the level of 18% of NDTL of the banks.
• SLR securities would include:
  • (a) Cash or (b) in Gold valued at a price not exceeding the current market price, or (c) Investment in the following instruments which will be referred to as "Statutory Liquidity Ratio (SLR) securities": 

(i) Dated securities of Government of India issued by RBI. 

(ii) Treasury Bills of the Government of India; 

(iii) Dated securities of the Government of India issued from time to time under the market borrowing programme and the Market Stabilization Scheme;

(iv) State Development Loans (SDLs) of the State Governments issued from time to time under the market borrowing programme; and 

(v) Any other instrument as may be notified by RBI. 

• In practice, most of the banks keep their SLR portion invested in Govt. securities because:
  • They get some returns from the Govt. securities whereas cash and gold are dead assets and would not fetch any interest. 
  • Since they are sovereign instruments, banks need not allocate any capital under credit risk.
• In addition, investing in Govt. securities also helps the Government in its borrowing program. As per Budget 2022, the Government is going to borrow Rs. 15 lakhs crores from the market.  
• The procedure to compute total NDTL for the purpose of SLR and its maintenance is broadly similar to the procedure followed for CRR including the penalties leviable by the RBI for non-maintenance of SLR on the shortfall amount .

 Money Market

• Having discussed CRR & SLR, let us now discuss money markets.
• Money Market is a market for short-term financial assets that are close substitutes of money.
• The most important features of money market instruments are:
  • They are liquid instruments.
  • Can be turned over quickly to cash at low cost.
  • Provides an avenue for equilibrating the short term surplus funds of depositors and the requirement of borrowers.
  • They are mostly discounted instruments (P-I)
  • For banks, the money markets instruments normally give a negative return when compared to their deposits. 
• Now we shall discuss the instruments available under this market.

 Treasury Bills (T.bills)

• Types: Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year. They are thus useful in managing short-term liquidity. At present, the Government of India issues six types of treasury bills, namely, CMBs, 1 day, 14-day, 91-day, 182-day and 364-day.
• Amount: T-bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. T-bills are issued at a discount and are redeemed at par.
• RBI issues a calendar of T-bill auctions. It also announces the exact dates of auction, the amount to be auctioned and payment dates by issuing press releases prior to every auction.
• Treasury bills are zero coupon securities and pay no interest. 
• They are issued at a discount and redeemed at the face value at maturity. 
• For example, a 91 day Treasury bill of Rs. 100/- (face value) may be issued at say  Rs. 98.20, that is, at a discount of say,  Rs. 1.80 and would be redeemed at the face value of  Rs. 100/-. 
• The return to the investors is the difference between the maturity value or the face value (that is  Rs. 100) and the issue price and in this case, it is Rs. 1.80.
• Implicit Yield will be: 
• (100 x 365 x 1.80)/ (98.20 x 91) = (65,700/8936.20) = 7.35%
• An auction may either be yield based or price based. 
• Yield Based Auction: A yield based auction is generally conducted when a new G-Sec is issued. Investors bid in yield terms up to two decimal places (e.g., 8.19%, 8.20%, etc.). 
• Bids are arranged in ascending order and the cut-off yield is arrived at the yield corresponding to the notified amount of the auction. 
• The cut-off yield is then fixed as the coupon rate for the security. Successful bidders are those who have bid at or below the cut-off yield. Bids which are higher than the cut-off yield are rejected. 
• The logic here is that RBI would give less yield to the investors.
• An illustrative example of the yield based auction is given below: 

Yield based auction of a new security 

• Maturity Date: January 11, 2016 
• Coupon: It is determined in the auction (8.22% as shown in the illustration below) 
• Auction date: January 08, 2016 
• Auction settlement date/Issue date: January 11, 2016* 
• Notified Amount:  Rs.1000 crore.
• January 9 and 10 being holidays (Saturday and Sunday), settlement is done on January 11, 2016 (T+1 settlement). 

Issue of Treasury Bills

• Price Based Auction: A price based auction is conducted when the Government of India re-issues securities which have already been issued earlier. Bidders quote in terms of price per Rs. 100 of face value of the security (e.g., Rs. 102.00, Rs. 101.00, Rs. 100.00, Rs. 99.00, etc., per Rs.100/-). 
• Bids are arranged in descending order and the successful bidders are those who have bid at or above the cut-off price. Bids which are below the cut-off price are rejected. 
• The logic here is that the RBI would try to recover maximum price from the investors.
• An illustrative example of price based auction is given in the next slide. 
• Price based auction of an existing security 8.24% GS 2018 
• Maturity Date: April 22, 2018 
• Coupon: 8.24% 
• Auction date: January 08, 2016 
• Auction settlement date: January 11, 2016* 
• Notified Amount: Rs. 1000 crore * January 9 and 10 being holidays (Saturday and Sunday), settlement is done on January 11, 2016 under T+1 cycle. 
• Depending upon the method of allocation to successful bidders, auctions may be conducted on  Uniform Price basis or Multiple Price basis. 
• In a Uniform Price auction, all the successful bidders are required to pay for the allotted quantity of securities at the same rate, i.e., at the auction cut-off rate, irrespective of the rate quoted by them. 
• On the other hand, in a Multiple Price auction, the successful bidders are required to pay for the allotted quantity of securities at the respective price / yield at which they have bid. 
• In the example under (ii) above, if the auction was Uniform Price based, all bidders would get allotment at the cut-off price, i.e., Rs. 100.20. On the other hand, if the auction was Multiple Price based, each bidder would get the allotment at the price he/ she has bid, i.e., bidder 1 at Rs. 100.31, bidder 2 at Rs. 100.26 and so on. 
• An investor, depending upon his eligibility, may bid in an auction under either under Competitive Bidding or under Non-Competitive Bidding categories: 
• Competitive Bidding: In a competitive bidding, an investor bids at a specific price / yield and is allotted securities if the price / yield quoted is within the cut-off price / yield. Competitive bids are made by well informed institutional investors such as banks, financial institutions, PDs, mutual funds, and insurance companies. The minimum bid amount is Rs. 10,000 and in multiples of Rs. 10,000 in dated securities and minimum Rs. 25,000 in case of T-Bills and in multiples of  Rs. 25,000 thereafter. Multiple bidding is also allowed, i.e., an investor may put in multiple bids at various prices/ yield levels. 

 Cash Management Bills (CMBs)

• Government of India in consultation with RBI had decided to issue this new short term instrument to meet the temporary cash-flow mismatches of the Government.
• CMBs in India are non-standard, discounted instruments issued for maturities less than 91 days.
• The CMBs have the generic character of Treasury Bills as the CMBs are issued at a discount and redeemed at face value at maturity. 
• CMBs are eligible as SLR securities. 
• CMBs came to the help of RBI in August 2013 and RBI  used CMBs to suck out excess liquidity from the banking system  in order to stop the rupee volatility.

 Reverse Repo

• Banks can keep their surplus funds with RBI for one day under RBI’s Reverse Repo Facility.
• For the amount kept by the Bank with RBI, RBI generates one day T. Bills and credits the SGL account of the Banks.
• These T. Bills carry an interest rate of 3.35%.
• It is said that the Reverse Repo Rate of RBI is 3.35%.

 T. Bill Mechanism

Main Features:

(i) The Bills of varying maturities with a maximum tenor of upto 364 days will be sold by RBI on auction basis. The date and place of auction, and the exact tenor of bills will be announced by the Bank from time to time.

(ii) RBI will notify the nominal amounts of bills to be sold to competitive bidders from time to time.

(iii) RBI may make allocations at the auctions by means of either ‘uniform price auction’ or ‘multiple price auction’. The method of auction will be announced by the Bank from time to time.

(iv) The Bills would be issued at a discounted price.

Let us assume that the cut-off price fixed in the auction is Rs.98.30. 

Bids upto the cut-off price i.e. A, B, C & D will be accepted. E & F will be rejected. 

In the case of the ‘Uniform Price’ auction, each successful bidder will have to pay @ Rs. 98.30 irrespective of bid prices individually quoted. The total amount payable will be (Rs. 98.30/100x300)= Rs. 294.90 crore; 

Whereas in the case of Multiple Price Auction, each successful bidder will have to pay the bid price he had offered. 

The total amount payable will be [(Rs. 98.50/100x 90) + (Rs. 98.40/100x 60) + (Rs. 98.35/100x80) + (Rs. 98.30/100x70)]= Rs. 295.18 crore.

RBI issues mostly yield based auctions in T. bills.

Even though, RBI date of issue of T. Bills are fixed as per circular, RBI nowadays does not strictly go with the schedule. 

Presently, it is reported that on all Wednesday, T. bills of 91, 182 and 364 days are available.

(v) In respect of competitive bids, the rate of discount and the corresponding issue price would be determined at each auction. 

In the case of uniform price auction, competitive bids will be accepted at the minimum discounted price called cut-off price determined at the auction, irrespective of bid prices tendered. 

In the case of multiple price auction, competitive bids will be accepted upto the minimum discounted price called ‘cut off’ price determined at the auction, at bid prices tendered at the auction. 

Competitive bids at offer prices lower than the ‘cut off’ price will be rejected in the case of both uniform and multiple price auctions 

Allocation for ‘non-competitive’ bids will be at the discretion of RBI. These non-competitive bids will be outside the notified amount. Such allocation for ‘non-competitive’ bids will be at the weighted average price arrived at on the basis of the competitive bids accepted at the auction.

RBI will have the full discretion to accept or reject any or all the bids either wholly or partially, as deemed fit by it, without assigning any reason.

RBI may, if it considers appropriate to do so participate in the auction as a ‘non-competitor’ and buy bills for part of or whole of the amount notified at the cut-off price decided in the auction.

Eligibility for Investment:

• The investment in the Treasury Bills, through competitive route, may be made by any person resident in India, including firms, companies, corporate bodies, institutions and Trusts. 
• Non-Resident Indians and Foreign Investors are eligible to invest subject to the approval of the Government and provisions of Foreign Exchange Management Act, 1999 and the Regulations framed there under, in addition to the other provisions of laws applicable to Government Securities.
• Eligible entities could participate on ‘non-competitive’ basis in auctions for specified Bills as decided by RBI from time to time. The State Governments, eligible provident funds in India, the Nepal Rastra Bank and any Person or Institution, specified by RBI, with the approval of Government, in this regard, can participate on non-competitive basis. Individuals can also participate on non-competitive basis as retail investors. For retail investors, the allocation will be restricted to a maximum of 5% of the aggregate nominal amount of the issue, within the notified amount as specified by the Government of India, or any other percentage determined by RBI.

Explanation: The allocation for individuals shall be within notified amount and for other eligible entities outside notified amount.

Note: Eligible Provident Funds are those non-government provident funds governed by the Provident Funds Act 1925 and Employees’ Provident Fund and Misc. Provisions Act, 1952 whose investment pattern is decided by the Government of India.

 Non-Competitive Bidding through Exchanges

RBI – November, 2017 Circular: 

• As part of the overall strategy of diversifying the investor base for government securities, the Government of India and RBI have been taking various measures to encourage participation of retail investors in G-Sec market including introduction of non-competitive bidding in primary auctions. 
• In continuation of this endeavor, the Union Budget 2016-17 had announced, inter-alia, that RBI will facilitate retail participation in the primary markets through stock exchanges. 
• In line with this announcement and in consultation with SEBI, it has been decided that in addition to scheduled banks and primary dealers; 

(a) Specified stock exchanges will be permitted to act as aggregators/facilitators. 

(b) These stock exchanges will submit a single consolidated non-competitive bid in the auction process and will put in place necessary processes to transfer the securities so allotted in the primary auction to their members/clients. 

(c) Stock-exchanges, desirous of acting as aggregators/facilitators, may approach CGM, IDMD, RBI, with a copy of the No Objection Certificate (NOC) from SEBI, for necessary approvals.

Eligibility: 

• Participation on a non-competitive basis in the auctions will be open to a retail investor who: 

1. does not maintain current account (CA) or Subsidiary General Ledger (SGL) account with the Reserve Bank of India; and 

2. Submits the bid indirectly through an Aggregator/Facilitator permitted under the scheme. 

Quantum: Allocation of non-competitive bids from retail investors will be restricted to a maximum of 5% of the aggregate nominal amount of the issue within the notified amount as specified by the Government of India, or any other percentage determined by RBI. 

Amount of Bid: 

1. The minimum amount for bidding will be Rs.10,000 (face value) and thereafter in multiples in Rs.10,000 as hitherto. 

2. In the auctions of GoI dated securities, the retail investors can make a single bid for an amount not more than Rupees Two crore (face value) per security per auction. 

 Other Operational Guidelines: 

1. The retail investor desirous of participating in the auction under the Scheme would be required to maintain a depository account with any of the depositories or a gilt account under the constituent subsidiary general ledger (CSGL) account of the Aggregator/Facilitator. 

2. Under the Scheme, an investor can make only a single bid in an auction. An undertaking to the effect that the investor is making only a single bid will have to obtained and kept on record by the Aggregator/Facilitator. 

Submission of Bids: 

• Each Aggregator/Facilitator on the basis of firm orders received from their constituents will submit a single consolidated non-competitive bid on behalf of all its constituents in electronic format on the Reserve Bank of India Core Banking Solution (E-Kuber) system.

Allotment of Bids: 

• Allotment under the non-competitive segment to the Aggregator/Facilitator will be at the weighted average rate of yield/price that will emerge in the auction on the basis of the competitive bidding. The securities will be issued to the Aggregator/Facilitator against payment on the date of issue irrespective of whether they have received payment from their clients. 
• In case the aggregate amount of bid is more than the reserved amount (5% of notified amount), pro rata allotment would be made. In case of partial allotments, it will be the responsibility of the Aggregator/Facilitator to appropriately allocate securities to their clients in a transparent manner. 
• In case the aggregate amount of bids is less than the reserved amount, the shortfall will be taken to the competitive portion.

Issue of Security: 

• Security would be issued only in SGL form by RBI. The Aggregator/Facilitator has to clearly indicate at the time of tendering the non-competitive bids the amounts (face value) to be credited to their main SGL or CSGL account. 
• Delivery in physical form from the Main SGL account is permissible at the instance of the investor subsequently. 
• It will be the responsibility of the Aggregator/Facilitator to pass on the securities to their clients. Except in extraordinary circumstances, the transfer of securities to the clients should be completed within five working days from the date of issue. 

 Latest News on Retailing of Govt. Securities

• Our Prime Minister in the month of November, 2021 through a virtual meet launched the ‘RBI Retail Direct scheme’. The scheme allows retail investors to buy and sell government bonds online. 
• RBI announced the scheme in its February 2021 monetary policy. The RBI portal for buying and selling of government securities can be accessed at rbiretaildirect.org.in
• RBI Retail Direct Scheme allows retail investors to buy and sell government securities (G-sec) online both in the primary and secondary markets. 
• According to details provided by RBI, these small investors can now invest in G-Secs by opening a gilt securities account  (equivalent of demat account) with the RBI. The account opened will be called Retail Direct Gilt (RDG) Account.

 Dated Securities

• Government paper with tenor beyond one year is known as dated security. At present, there are dated securities with a tenor up to 30 years in the market.

Auction/Sale:

• Dated securities are sold through auctions or through sale. Actually, the sale or auction in dated security would mean that the coupon for the security is either auctioned or is fixed. Fixed coupon securities are sometimes also sold on tap that is kept open for a few days.

Announcement:

• Though there is no calendar for G-secs sale, the Government of India and the Reserve Bank issue a press release to announce the sale. The press release is widely reported in the print media and wire agencies. The government of India also issues an advertisement in the leading financial newspapers. The announcement of auctions/sales and their results are also published on the Reserve Bank website.

Amount:

• Subscriptions can be for a minimum amount of Rs.10,000 and in multiples of Rs.10,000.

Call Money

The prudential limits in respect of both outstanding borrowing and lending transactions in call/notice money market are:

For Banks: 

• Borrowing: On a fortnightly average basis, borrowing outstanding should not exceed 100% of capital funds (sum of Tier 1 and Tier II) of the latest audited balance sheet.
• However, banks are allowed to borrow a maximum of 125% of their capital funds on any day, during a fortnight.

For Banks – Lending:

• On a fortnightly average basis, lending outstanding should not exceed 25% of their capital funds, however, banks are allowed to lend a maximum of 50% of their capital funds on any day, during a fortnight.

For Co-operative Banks – Borrowing:

• Borrowing outstanding by State Co-operative Banks / District Central Co-operative Banks / Urban Co-operative Banks on a daily basis should not exceed 2% of their aggregate deposits as at the end of March of the previous financial year.
• Lending: No limit
• Non-Bank Institutions are not permitted in the call / notice money market with effect from August 6, 2005.

Interest Rate:

• Eligible participants are free to decide on the interest rates in the call/notice money market.

Dealing Session:

• Deals in Call / notice money market can be done upto 5.00 pm on weekdays and on working Saturdays or as specified by RBI from time to time.

 Notice Money & Term Money

 Notice Money: Under call money market, funds are transacted on an overnight basis, whereas under notice money market, funds are transacted for a period between 2 days and 14 days. This is also called Money at Call and Short notice.

Term Money: Market is for placement of funds with banks for periods in excess of 14 days, but not exceeding 1 year. Typically term money placements range from 1 month to 6 months, and placements for longer periods are not seen commonly in our market.