Quick Guide to Terms Used in Day to Day Banking

1. Quick Guide to Terms Used in Day to Day Banking CA Jyot Shukla – Vadodara

2. Index • What is CRR? • What is SLR? • What is PLR? • What is Repo Rate? • What is Reverse Repo Rate? • What is Sub prime lending? • Basel II Jyot Shukla - Vadodara

3. WHAT IS CRR ? • CRR Stands for Cash Reserve Ratio • A CRR is the % of bank Reserve to Deposit and Notes, CRR is the amount of Funds that the banks have to keep with RBI • If RBI decides to increase the % of this, the available amount with the banks comes down • RBI increases CRR rate to pull out the excessive money from the banks • It is also Known as Cash Asset Ratio or Liquidity Ratio • CRR is used as tool in Monetary Policy, which influence Country’s Economy, Borrowing and Interest Rates across the country Jyot Shukla - Vadodara

4. WHAT IS SLR? • SLR stands for Statutory Liquidity Reserve/Ratio • Statutary Liquidity Reserve/Ratio(SLR) is percentage of deposits the bank has to maintain in form of gold, cash or other approved securities. It regulates the credit growth in India • Every financial institute is required to maintain a Statutory Liquidity reserve (SLR) of 25% (including CRR) on all its liabilities. Jyot Shukla - Vadodara

5. WHAT IS PLR? • PLR stands for Prime Lending Rate. • The interest rate that commercial banks charge their best, most credit-worthy customers. • It is minimum lending rate at which credit line is offered to prime borrowers Jyot Shukla - Vadodara

6. WHAT IS REPO RATE? • When the banks are having Shortages of Funds, they borrow it from RBI. • Repo Rate is the Rate at which banks borrow money from RBI. • Low Repo Rate means banks are getting cheaper rate loans from RBI. • When Repo Rate increases borrowing from RBI becomes more expensive Jyot Shukla - Vadodara

7. WHAT IS REVERSE REPO RATE? • Reverse Repo rate is the rate at which RBI borrows money from banks. • Banks lend the money to RBI for safeguarding the money with good amount of interest • An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system. Jyot Shukla - Vadodara

8. WHAT IS SUB PRIME LENDING? • Sub Prime Lending is lending at a higher rate than the Prime Rate. • Type of Loan offered at Rate above Prime to individuals who do not qualify from Prime Lending Rate loans. • A subprime loan is offered at a rate higher than Business loans due to the perceived increased risk. • Subprime lending includes a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards etc. Jyot Shukla - Vadodara

9. BASEL II NORMS • The Basel Committee consists of representatives from central banks and regulatory authorities of the G 10 countries, plus others (specifically Luxembourg and Spain). • Basel II defines three approaches for calculating credit risk weights to accommodate different levels of sophistication across banks: • The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: Credit Risk, Operational Risk & market Risk. Other risks are not considered fully quantifiable at this stage. • The second pillar deals with the regulatory response to the first pillar, giving Regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as Systemic Risk, Pension Risk, Strategic Risk, Reputation Risk, Liquidity Risk & Legal Risk, which the accord combines under the title of residual risk • The third pillar greatly increases the Disclosure that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately Jyot Shukla - Vadodara