cash reserve ratio, statutory liquidity ratio, borrowing and lending behaviour of financial institutions

1. CRR & SLR
Management

2. Cash Reserve Ratio (CRR)
 It is a specified minimum fraction of the
total deposits of customers, which
commercial banks have to hold as
reserves either in cash or as deposits
with the central bank.
 CRR is set according to the guidelines of
the central bank of a country.
 RBI can vary CRR between 3% & 15%.
 Current CRR rate is 4%

3.  The amount specified as the CRR is held in cash and cash
equivalents, is stored in bank vaults or parked with the
Reserve Bank of India. The aim here is to ensure that banks
do not run out of cash to meet the payment demands of their
depositors. CRR is a crucial monetary policy tool and is used
for controlling money supply in an economy.
 CRR specifications give greater control to the central bank
over money supply. Commercial banks have to hold only
some specified part of the total deposits as reserves. This is
called fractional reserve banking
 The higher the reserve requirement is set, the less funds
banks will have to loan out, leading to lower money creation
and perhaps ultimately to higher purchasing power of the
money previously in use.

4. Determinants of CRR
 Banking habits of people
 Nature of accounts
 Size of deposits
 Structure of money market

5.  The ratio of liquid assets to net demand
and time liabilities (NDTL) is called
statutory liquidity ratio (SLR).
 Banks have to maintain a stipulated
proportion of their net demand and time
liabilities in the form of liquid assets like
cash, gold and unencumbered securities.
 Banks have to report to the RBI every
alternate Friday their SLR maintenance,
and pay penalties for failing to maintain
SLR as mandated.
 Current SLR rate is 21.5%
Statutory liquidity ratio (SLR)

6. • SLR rate = {liquid assets / (demand +
time liabilities)} × 100%
OBJECTIVES OF SLR:
 to control the expansion of bank credit.
By changing the level of SLR, the
Reserve Bank of India can increase or
decrease bank credit expansion.
 to ensure the solvency of commercial
banks.
 to compel the commercial banks to
invest in government securities like
government bonds.

7.  CRR controls liquidity in banking system
while SLR regulates credit growth in the
country.
 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
central bank, whereas SLR is money
deposited in govt. securities.
Difference between CRR & SLR

8. A financial institution is an establishment that conducts
financial transactions such as investments, loans and
deposits. Everything from depositing money to taking out
loans and exchanging currencies must be done through
financial institutions. Most financial institutions are
regulated by the government.
Some financial institutions are :
•commercial banks
•credit unions
•savings and loans
• securities broker dealers
• insurance companies
• investment bankers and
•credit card system operators.
Financial instituions.

9. Commercial Banks
Commercial banks accept deposits and provide security and
convenience to their customers. With banks, consumers no longer
need to keep large amounts of currency on hand; transactions can be
handled with checks, debit cards or credit cards, instead. Commercial
banks also provide loans that individuals and businesses use to buy
goods or expand business operations, which in turn leads to more
deposited funds that make their way to banks. Banks lend money at
a higher interest rate than they have to pay for funds and operating
costs, and thus, they make money.
Investment Banks
Investment banks may be called "banks," but their operations are far
different than deposit-gathering commercial banks. An investment
bank is a financial intermediary that performs a variety of services
for businesses and some governments. These services include
underwriting debt and equity offerings, acting as an intermediary
between an issuer of securities and the investing public, acting as a
broker for institutional clients. They may also provide research and
financial advisory services to companies.
Borrowing and lending behaviour

10. Insurance Companies
Insurance companies pool risk by collecting premiums from a
large group of people who want to protect themselves against a
particular loss, such as a fire, car accident, illness, lawsuit,
disability or death. Insurance helps individuals and companies
manage risk and preserve wealth. By insuring a large number of
people, insurance companies can operate profitably and at the
same time pay for claims that may arise. Insurance companies use
statistical analysis to project what their actual losses will be within
a given class. They know that not all insured individuals will suffer
losses at the same time or at all.
Brokerages
A brokerage acts as an intermediary between buyers and sellers
to facilitate securities transactions. Brokerage companies are
compensated via commission after the transaction has been
successfully completed. For example, when a trade order for a
stock is carried out, an individual often pays a transaction fee for
the brokerage company's efforts to execute the trade.

11. Investment Companies
An investment company is a corporation or a
trust through which individuals invest in
diversified, professionally managed portfolios of
securities by pooling their funds with those of
other investors. Rather than purchasing
combinations of individual stocks and bonds for
a portfolio, an investor can purchase securities
indirectly through a package product like a
mutual fund.

12. VALUATION OF INVESTMENT
The process of determining the current worth of an asset
or company. There are many techniques that can be used
to determine value, some are subjective and others are
objective.
For example, an analyst valuing a company may look at
the company's management, the composition of its capital
structure, prospect of future earnings, and market value of
assets.
Judging the contributions of a company's management
would be more of a subjective valuation technique, while
calculating intrinsic value based on future earnings would
be an objective technique.

13. Valuation methods
Direct valuation methods provide a direct estimate of a company’s
fundamental value. In the case of public companies, the analyst
can then compare the company’s fundamental value obtained
from that valuation analysis to the company’s market value. The
company appears fairly valued if its market value is equal to its
fundamental value, undervalued if its market value is lower than
its fundamental value, and overvalued if its market value is higher
than its fundamental value.
In contrast, relative valuation methods do not provide a direct
estimate of a company’s fundamental value: They do not indicate
whether a company is fairly priced; they indicate only whether it
is fairly priced relative to some benchmark or peer group. Because
valuing a company using an indirect valuation method requires
identifying a group of comparable companies, this approach to
valuation is also called the comparables approach.

14. Direct (or Absolute)
Valuation Methods
Relative (or Indirect)
Valuation Methods
Valuation methods that rely
on cash flows
Discounted cash flow models:
Free cash flow to the firm
model
Free cash flow to equity
model
Adjusted present value
model
Option-pricing models:
Real option analysis
Price multiples:
Price-to-cash-flow ratio
Valuation methods that rely
on a financial variable other
than cash flows
Economic income models:
Economic value analysis
Price multiples*:
Price-to-earnings ratios (P/E
ratio, P/EBIT ratio, and
P/EBITDA ratio)
Price-to-sales ratio
Price-to-book ratio
Enterprise value multiples:
EV/EBITDA multiple
EV/Sales multiple
* E stands for earnings; EBIT for earnings before interest and taxes; EBITDA to earnings before
interest, taxes, depreciation, and amortization; and EV for enterprise value.