SOURCES OF FUNDS

Paid-up capital, Reserves and Surpluses, and various types of deposits constitute major sources of funds of commercial banks in India. (i) Paid up capital: Capital base of commercial banks in india is much smaller compared to that of banks in developed countries. In India the share of paid-up capital in total resources of these banks is only about 1 per cent while in developed countries it is around 7-10 per cent. Of late there is an attempt to expand thecapital base of commercial banks. Reserves and surpluses: Commercial banking operations hover around risk and liquidity . Therefore, it is obligatory on commercial banks to set aside atleast 20 per cent of their profits as reserves. Accumulated reserves and surpluses of commercial banks are now matching their paid-up capital.With greater diversification of banking activities into more profitable services, the share of reserves and surpluses in total resources of the banks is expected to increase. Deposits: Deposits from customers constitute a major source of funds for commercial banks. About 98 per cent of total funds are obtained through Demand Deposits, Time Deposits and Saving Deposits. Three-fifths of total deposits are in the form of fixed deposits. They form the very basis of the lending operations of the banks.Since the commencement of planning in 1951, total deposits with commercial banks have grown by more than 200-times. The growth is around 50 times since the nationalization of banks in 1969.Deposits with banks are equivalent to about half the national income. Many factors have contributed to the phenomenal increase in bank deposits over the last few decades, such as, a) increase in national income, b) increase in the number of branches in the country, c) expansion of branches in rural sectors,d) the introduction of a variety of new deposit schemes to suit different types of customers, e) confidence of public in the nationalised banks, f) higher rate of return on bank deposits, g) comparatively lower public confidence incorporate business enterprises and defaults by them in payment of interest and repayment of principal, h) vigourous promotional efforts by banks I inflow of deposits from non-resident Indians both repatriable and non-repatriable. Application of funds: Considerations of liquidity are of special importance for commercial banks. As a result they are obliged to maintain certain minimum cash balances with Reserve bank of India. Some investment is also necessary in buildings, furniture, office equipment, etc for conducting operations. For balancing the considerations of liquidity and profitability part of the investment is made in very short term and short term loans and advances and

(ii)

(iii)

readily realisable securities, such as, money at call and short notice, bills discounted and purchased, Treasury bills etc. However, it is the medium-term and long-term investment and loans and advances which are high income yielding. Therefore, a significant part of available funds is invested in long-term securities, shares, debentures, bonds and long-term lendings, requiring a fine balancing in the requirements of, profitability and security.

Investment policy of commercial banks: the investment policy has to balance a number of conflicting considerations and business requirements. Important considerations in determining investment policy of commercial banks are as follows: (i) Liquidity : Liquidity refers to the availability of cash as and when required. Maintenance of adequate liquidity is important for all businesses, but it is more so in the case of banking business. There are two reasons for this,(a) banking is based on confidence of depositors that they will be able to withdraw their deposits whenever they require without fear of default by banks, and(b) banks deal with other peoples money, major part of which is repeatable on demand. Liquidity management is, therefore, as important as profitability management in case of banks. Profitability :Commercial banks deal in people's money with a view to earning profits. Therefore, they have to,(a) maximise operational efficiency and achieve economy in day-to-day expenses, and(b) maximise earnings on their investments without sacrificing considerations of liquidity and safety. But there is a conflict between liquidity and profitability. Cash, which is readily liquid, does not earn at all. Investment is near-cash(example, money at call an short notice) generally earns least; short-term investment earns little more; and generally rate of return is high on medium and long-term loans and advances. Banks are liable to repay on demand and they have also to pay interest to their depositors. The total earnings should be more than the interest they pay and other expenses they incur so as to generate adequate profits. Therefore, banks maintain a portion of the funds in the form of cash, near-cash and short-term investments, and a major share of the investment is maintained in Treasury bills and medium and long-term loans and advances in different forms. Safety: banks have to maintain high degree of the safety in their operations. Banks, therefore, avoid speculative transactions and invest mostly in safe securities whose value fluctuates only within reasonable limits. They lend against adequate security to customers a very high financial standing. Convertibility and shiftability: Banks should maintain a portion of their investment in such assets which can be easily and quickly converted into cash in time of need. Some assets should be shiftable or transferable to

(ii)

(iii)

(iv)

(v)

(vi)

other banks or to the Central bank of the country for acquiring cash in case of an emergency or crisis. Assets and securities and shiftable the central bank only if they satisfy certain eligibility rules. Investment in these assets helps balancing considerations of liquidity and profitability. Social considerations: in India, as in many other countries, banks are an instrument of balanced economic development and social change. Public sector as well as private sector banks have to meet targets in respect of branch expansion, regional distribution of branches, regional distribution of credit, credit to agriculture, small-scale industries and other priority sectors at concessional rates. These social considerations come in conflict with profit maximisation. Other regulations: reserve bank of India specifies Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). While deciding investment policy commercial banks have to adhere to CRR and SLR requirements. In case of default, banks are subjected to severe penalty. With a view to ensuring that non-SLR investments are made on sound prudential considerations, with more transparency and guarding against potential risks, draft guidelines for banksnon-SLR investments have been involved in consultation with banks and financial institutions these were circulated among them on April 4, 2000.

Banks investment norms: The reserve bank has issued guidelines on cataract categorisation and valuation of banksinvestment portfolio. These guidelines are in conformity with international best practices, and are effective from September 30, 2000. This salient features of the guidelines are given below: The entire investment portfolio is to be classified under three categories (a) Held to Maturity (HTM), (b) Held for Trading HFT and (c) Available for Sale (AFS). HTM include securities acquired with the intention of being held up to maturity; HFT includes securities acquired with the intention of being traded to take advantage of the short-term price/interest-rate movements; and AFS include securities not included in HTM and HFT. Bank should decide the category of investment at the time of acquisition. In the balance sheet, investments will continue to be classified under six heads: (a) government securities, (b) other approved securities, (c) shares, (d) debentures and bonds, (e) subsidiaries of joint ventures and, (f) others. Investments classified under STM need not be marked to market, and will be carried at acquisition cost. These investments will

include: (a) recapitalisation bonds,(b) investments in subsidiaries and joint ventures and (c) investments in debentures deemed as advance. HTML will also include any other investment identified for inclusion in this category subject to the condition that such investments will not exceed 25% of the total investment excluding (a) to (c) cited above. Banks which had already marked to market more than 75% of the SLR portfolio, have the option to reclassify the investments under this category up to the permissible level. profit on sale of investment in the HTM degree should be taken to the P&L account before being appropriated to the Capital Reserve account. Loss on sale should be recognised in the P&L account. Banks are free to decide on the extent of holdings under the HFT and AFS categories, based on relevant considerations like tax planning, a risk management capabilities and trading strategies. Individual scrips in the AFS need to be marked to market at the year end or at more frequent intervals. Individual scrips in the HFT category are to be revalued at least at monthly intervals, Market price of the script available from the trades/quotes on the stock exchange, price affairs SGLtransactions of RBI price list would serve as the market valuefor investments in AFS and HFS. Investments under the HFT category should be sold within 90 days; in the event of inability to sell due to adverse factors like tightly liquidity, extreme volatility, or an un-directional movement in market, the unsold securities should be shifted to the AFS category. Profit or loss on sale of investments in both HFT and AFS categories should be taken in the P& L account. Shifting of investments from/to HMT may be done with the approval of the board once a year, normally at the beginning of the accounting year. Investments from AFS to HFT may be done with the approval of the board/ALCO/Investment committee. Shifting from HFT to AFS is generally not allowed. Under all circumstances, the shifting of investments from one category to another should be done at lowest value among acquisition cost, book value or market value. Depriciation, if any, should be fully provided for. RBI will no longer announce the Yield to Maturity YTM rates for unquoted government securities for the purpose of valuation of investments by banks.

Investment fluctuation reserve: With a view to building up of adequate reserves to guard against any possible reversal of interest-rate environment in future, banks have been advised to build up Investment Fluctuation Reserve (IFR) with reference to investments, into categories,viz., Held for Trading (HFT) and Available for Sale (AFS). The IFR as at end-March 2002 constituted 0.91%. Of the investment held under HFT and AFS categories. The distribution of IFR holdings of banks show that while about 47% of the banks had built up reserve up to 1% about 16% of banks were yet to make any provisions for IFR . As per the extant guidelines, banks are required to build a IFR of a minimum 5%. Factors determining liquidity of banks: Large number of considerations, such as statutory requirements, level and general economic activity, nature of investments, nature of customers, banking habits of customers, and number and size of deposits, structure of banking, sources of arranging the liquidity in need, efficient money market and the liquidity maintained by other banks, determining liquidity acquirement of banks. These are discussed below: 1.Statutory requirements: Banks allowed freedom regarding the size of cash balances that they maintain that other liquid assets that they maintain are regulated by liquidity requirement prescribed by Reserve bank of India through Cash Reserve Ratio and Statutory Liquidity Ratio. Cash reserve ratio: Under section 42 of reserve bank of India act, 1934, scheduled banks are required to maintain with RBI a specified percentage of their net demand and time liability NDTL in the form of cash reserve. This ratio could vary between 3 and 15%. This CRR was reduced gradually from its peak of 15% of NDTL in 1992 to 4.5% by June 2003. With a view to provide greater flexibility to the RBI for monetary management through CRR, the RBI (Amendment) Bill, 2006, was enacted in June 2006. The amendment to the subsection (1) of section 42 of the RBI act, vests RBI with the power to prescribe CRR for scheduled banks without any floor or ceiling rate thereby removing the statutory minimum CRR limit of 3%. Payment of penal interest in case of non adherence in the first fortnight, to be raised in the subsequent fortnights. RBI pays interest on CRR balances. Presently, the concept of average daily balance has been linked to balances held at close of business on each day of the fortnight instead of a week. Banks are required to file fortnightly returns on each alternate Friday in a month instead of each Friday of the month. At present, effective from the fortnight beginning April 24, 2010, the CRR is prescribed at 6.00 per cent of a bank's total of NDTL.

Statutory liquidity ratio: Under section 24(2-A) of the banking regulation act 1949, as amended by the act of 1984,RBI,requires scheduled commercial banks to hold assets, such as, gold and an income word approved securities against their NDT L in addition to cash reserve requirement. Government securities are stable in value and are easily marketable and shiftable to RBI. Therefore, they are regarded as eligible securities for SLR. This measure was designed primarily for ensuring adequate solvency for commercial banks. However, SLR requirement has also been used as a low rate borrowing source for the government.. The SLR was decreased from 25% which was continuing since 07/11/2009. At present the SLR is 24% since, 18th December, 2010. Thus, a little over one-third of NDTL of commercial banks resources are locked in lowearning cash reserves and liquid assets. 2. Interest on cash balance is maintained with RBI under CRR Before the announcement of credit policy on October 2, 1997, all scheduled banks

3. General economic activity: During a period of business boom banks can manage with relatively smaller liquid assets. On the contrary, during depression banks have to maintain larger liquidity because there is higher probability of people withdrawing their deposits. 4. Nature of investments: Banks which need large investment in assets and securities which cannot be easily converted into cash in a short period will have to maintain larger cash balances and liquid assets, and vice versa. 5. Nature of customers: in case most customers of a band are involved in seasonal activity then liquidity requirement of the bank will also vary from season to season. During busy season, like, harvest season in agricultural countries, banks will have to finance larger number of transactions and have to maintain larger cash balances. In slack season, banks can do with lesser cash and liquid assets. 6. Nature of deposits: Banks with mostly time deposits can manage with lesser liquidity as compared banks having mainly current accounts. 7. Banking habits of customers: where banking habits are strong, that is, most transactions in the economy done through cheques, banks can manage operations with lower liquidity, Contrawise large liquidity needs to be maintained by banks of carrying out same level of operations.

8. Number and size of deposits: Banks with a large number of small depositors can manage with lower cash balances because overall fluctuations in withdrawals will be minimal. Banks with smaller number of large depositors will have to maintain larger cash balances as sudden withdrawal by a few depositors will make liquidity position of banks precarious. 9. Structure of banking: In case of branch banking where each bank has recourse to Central bank, liquidity requirement is generally lower compared with that in case of unit banking. 10. Alternative source of liquidity: Banks, which can make emergency arrangements of cash from RBI or a big business houses with which they have relation, have to maintain lower liquidity. Otherwise, liquidity requirement will be higher. 11. Existence of efficient money market: Whenever there is efficient money market so that investments can be easily and quickly converted into cash, liquidity requirement of banks will be lower, and vice versa. 12. General practice in the banking sector: Extent of liquidity maintained by a particular commercial banks is also influenced by general practice adopted by other banks doing same type of banking business. ASSET STRUCTURE OF COMMERCIAL BANKS Banks maintain various types of assets such as cash, money at call and short notice, shortterm bills, loans and advances and investments. Nature of these assets has been discussed below: 1.Cash balances: Cash balances into cash with the bank itself, Cash with other Banks, and Cash Reserves held with the Reserve bank. Minimum cash balances a quiet to be maintained by commercial banks with the Reserve bank are determined by the reserve bank as explained earlier. Larger the cash balances, higher is the liquidity and safety but lower the profitability because cash is a non-earning asset. 2. Money at call and short notice: All those loans were shebang can recover back on demand or at short notice are called money call and short notice. Such loans are generally given to stock brokers, dealers and commercial banks, discount houses and to other commercial banks. India has developed interbank call money market. These loans are given to very sound borrowers and are therefore safe. These loans are highly liquid that carry low rate of interest. 3. Short-term bills: Commercial banks make investment in commercial bills and promissory notes which are for short periods, generally maturing in 90 days. These bills are selfliquidatingbecause they represent a genuine commercial transaction and get realised immediately on maturity. These bills are highly negotiable and therefore easily marketable. They can be discounted. They also bear a good rate of interest. In addition, banks also invest in 91-day and 364-day treasury bills. These bills carry low rates of interest but are totally safe and are eligible security for rediscounting with RBI.

4. Loans and advances: Major part of banks resources get involved in loans and advances and the major source of banks income. They can be broadly classified into ordinary loans and advances, overdraft and cash credit. Then nature has already been discussed. Loans and advances on high rate of interest but they also carry a high risk. They are low in liquidity and are also difficult to shift to other parties. Banks are generally very careful by giving loans and advances. They give loans either against full security in the form of mortgage of land and building or hypothecation of machinery, stocks, shares, etc. (i.e., liquidation approach to lending), or after thorough analysis of earning prospects and the repayment capacity of the borrower or considering both. Loans and advances poor in safety. Most of the bank failures are due to imprudent lending policies. Therefore, following precautions should be observed by granting loans and advances i) Loans should be given against collateral security and addition to personal security. ii) There should always be adequate margin on security but that will vary depending on the nature of security, eg, margin may be less if security is in the form of cold and treasury bills, and it may be more if it is shares of private sector companies. iii) Loans should be given for productive purposes. Consumption alone should be avoided. Of course, loans for purchase of cars, houses, etc. are now becoming popular in India. iv) Loans must never be given for speculative activities. They are too risky. v) Big loans to few borrowers should be avoided. Loans should be diversified ,i.e., distributed to a large number of borrowers located in different regions and pursuing different types of business activities. This minimises the quantum of risk. vi) Renewal of loan should be minimised. vii) Loans and advances should be only within the risk bearing capacity of banks. viii)Banks should always maintain inadequate liquidity levels,i.e., CRR and SLR. ix) Banks must obtain adequate credit information about the earning capacity, financial position, fund flow and cash flow of the borrower before granting loans. Formerly commercial banks were concentrating on only short-term loans, that is, loans foe meetting working capital requirement of business houses. But, of late, commercial banks throughout the world have started making medium-term and long-term loans and advances also. 5. Investments: Banks also need long period investment in Central and State government bonds, bond issued by local bodies, public sector bonds, and fixed interest yielding debentures over bonds of sound and well established companies. Investment in specified public sector bonds and government securities is preferred because: (i) they can be shifted to the central bank, other banks and other institutions, and (ii) the can earn good income. However, sufficient caution needs to be exercised while investing in bonds of public utilities and in the shares and bonds of private sector companies. Their prices may fluctuate and the

banks may suffer loss particularly in a situation of distress selling when banks are urgent need of liquid resources for meeting statutory requirements on depositors demand.
1. Introduction

With a view to monitoring compliance of maintenance of statutory reserve requirements viz. CRR and SLR by the SCBs, the Reserve Bank of India has prescribed statutory returns i.e. Form A return (for CRR) under Section 42 (2) of the RBI Act, 1934 and Form VIII return (for SLR) under Section 24 of the Banking Regulation Act, 1949. 1.1 CRR In terms of Section 42 (1) of the Reserve Bank of India Act, 1934 the Reserve Bank having regard to the needs of securing the monetary stability in the country, prescribes the CRR for SCBs without any floor or ceiling rate. 1.2 Maintenance of CRR Cash Reserve Ratio increased from 5.00% to 5.50% wef 13/02/2010; and then again to 5.75% wef 27/02/2010 At present, effective from the fortnight beginning April 24, 2010, the CRR is prescribed at 6.00 per cent of a bank's total of DTL.

1.3 Incremental CRR In terms of Section 42(1-A) of RBI Act, 1934, the SCBs are required to maintain, in addition to the balances prescribed under Section 42(1) of the Act, an additional average daily balance, the amount of which shall not be less than the rate specified by the Reserve Bank in the notification published in the Gazette of India from time to time. Such additional balance will be calculated with reference to the excess of the total of DTL of the bank as shown in the Returns referred to in Section 42(2) of the Act, 1934 over the total of its DTL at the close of the business on the date specified in the notification. At present no incremental CRR is required to be maintained by the banks. 1.4 Computation of DTL Liabilities of a bank may be in the form of demand or time deposits or borrowings or other miscellaneous items of liabilities. As defined under Section 42 of the RBI Act, 1934, liabilities of a bank may be towards the banking system or towards others in the form of demand and time deposits or borrowings or other miscellaneous items of liabilities. The Reserve Bank of India has been authorized in terms of Section 42 (1C) of the RBI Act, 1934,

to classify any particular liability and hence for any doubt regarding classification of a particular liability, banks are advised to approach the RBI for necessary clarification. 1.5 Demand Liabilities Demand Liabilities of a bank are liabilities which are payable on demand. These include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees, balances in overdue fixed deposits, cash certificates and cumulative/recurring deposits, outstanding Telegraphic Transfers (TTs), Mail Transfer (MTs), Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand. Money at Call and Short Notice from outside the Banking System should be shown against liability to others. 1.6 Time Liabilities Time Liabilities of a bank are those which are payable otherwise than on demand. These include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit, if not payable on demand, deposits held as securities for advances which are not payable on demand and Gold deposits. 1.7 Other Demand and Time Liabilities (ODTL) ODTL include interest accrued on deposits, bills payable, unpaid dividends, suspense account balances representing amounts due to other banks or public, net credit balances in branch adjustment account, any amounts due to the banking system which are not in the nature of deposits or borrowing. Such liabilities may arise due to items like (i) collection of bills on behalf of other banks, (ii) interest due to other banks and so on. If a bank cannot segregate the liabilities to the banking system, from the total of ODTL, the entire ODTL may be shown against item II (c) 'Other Demand and Time Liabilities' of the return in Form 'A' and average CRR maintained on it by all SCBs . Participation Certificates issued to other banks, the balances outstanding in the blocked account pertaining to segregated outstanding credit entries for more than 5 years in interbranch adjustment account, the margin money on bills purchased / discounted and gold borrowed by banks from abroad, also should be included in ODTL. Cash collaterals received under collateralized derivative transactions should be included in the banks DTL/NDTL for the purpose of reserve requirements as these are in the nature of outside liabilities. 1.8 Assets with the Banking System Assets with the banking system include balances with banks in current account, balances with banks and notified financial institutions in other accounts, funds made available to banking

system by way of loans or deposits repayable at call or short notice of a fortnight or less and loans other than money at call and short notice made available to the banking system. Any other amounts due from banking system which cannot be classified under any of the above items are also to be taken as assets with the banking system. 1.9 Borrowings from abroad by banks in India Loans/borrowings from abroad by banks in India will be considered as 'liabilities to others' and will be subject to reserve requirements. Upper Tier II instruments raised and maintained abroad shall be reckoned as liability for the computation of DTL for the purpose of reserve requirements. 1.10 Arrangements with Correspondent Banks for Remittance Facilities When a bank accepts funds from a client under its remittance facilities scheme, it becomes a liability (liability to others) in its books. The liability of the bank accepting funds will extinguish only when the correspondent bank honours the drafts issued by the accepting bank to its customers. As such, the balance amount in respect of the drafts issued by the accepting bank on its correspondent bank under the remittance facilities scheme and remaining unpaid should be reflected in the accepting bank's books as liability under the head ' Liability to others in India' and the same should also be taken into account for computation of DTL for CRR/SLR purpose. The amount received by correspondent banks has to be shown as 'Liability to the Banking System' by them and not as 'Liability to others' and this liability could be netted off by the correspondent banks against the inter-bank assets. Likewise sums placed by banks issuing drafts/interest/dividend warrants are to be treated as 'Assets with banking system' in their books and can be netted off from their inter-bank liabilities. 1.11 Liabilities not to be included for DTL/NDTL computation The under-noted liabilities will not form part of liabilities for the purpose of CRR and SLR: a) Paid up capital, reserves, any credit balance in the Profit & Loss Account of the bank, amount of any loan taken from the RBI and the amount of refinance taken from Exim Bank, NHB, NABARD, SIDBI; b) Net income tax provision; c) Amount received from DICGC towards claims and held by banks pending adjustments thereof; d) Amount received from ECGC by invoking the guarantee; e) Amount received from insurance company on ad-hoc settlement of claims pending judgment of the Court; f) Amount received from the Court Receiver; g) The liabilities arising on account of utilization of limits under Bankers Acceptance Facility (BAF);

h) District Rural Development Agency (DRDA) subsidy of Rs.10, 000/- kept in Subsidy Reserve Fund account in the name of Self Help Groups; i) Subsidy released by NABARD under Investment Subsidy Scheme for Construction/Renovation/Expansion of Rural Godowns; j) Net unrealized gain/loss arising from derivatives transaction under trading portfolio; k) Income flows received in advance such as annual fees and other charges which are not refundable. l) Bill rediscounted by a bank with eligible financial institutions as approved by RBI and, (m) Provision not being a specific liability arising from contracting additional liability and created from profit and loss account. 1.12 Exempted Categories SCBs are exempted from maintaining CRR on the following liabilities: i. Liabilities to the banking system in India as computed under Clause (d) of the explanation to Section 42(1) of the RBI Act, 1934; ii. Credit balances in ACU (US$) Accounts; iii Demand and Time Liabilities in respect of their Offshore Banking Units (OBU);and iv SCBs are not required to include inter-bank term deposits/term borrowing liabilities of original maturities of 15 days and above and up to one year in "Liabilities to the Banking System" (item 1 of Form A return). Similarly banks should exclude their inter-bank assets of term deposits and term lending of original maturity of 15 days and above and up to one year in "Assets with the Banking System" (item III of Form A return) for the purpose of maintenance of CRR. The interest accrued on these deposits is also exempted from reserve requirements. 1.13 Loans out of FCNR (B) Deposits and IBFC Deposits Loans out of Foreign Currency NonResident Accounts (Banks), (FCNR [B] Deposits Scheme) and Inter-Bank Foreign Currency (IBFC) deposits should be included as part of bank credit while reporting in Form A return. For the purpose of reporting, banks should convert their FCNR (B) deposits, overseas foreign currency assets and bank credit in India in foreign currency in 4 major currencies into rupees at FEDAI noon mean rate on the reporting Friday. 1.14 Procedure for Computation of CRR In order to improve cash management by banks, as a measure of simplification, a lag of one fortnight in the maintenance of stipulated CRR by banks has been introduced with effect from the fortnight beginning November 06, 1999.

1.15 Maintenance of CRR on Daily Basis With a view to providing flexibility to banks in choosing an optimum strategy of holding reserves depending upon their intra fortnight cash flows, all SCBs are required to maintain minimum CRR balances up to 70 per cent of the average daily required reserves for a reporting fortnight on all days of the fortnight with effect from the fortnight beginning December 28, 2002. 1.16 No Interest Payment on Eligible Cash Balances maintained by SCBs with RBI under CRR In view of the amendment carried out to RBI Act 1934, omitting sub-section (1B) of Section 42, the Reserve Bank does not pay any interest on the CRR balances maintained by SCBs with effect from the fortnight beginning March 31, 2007. 1.17 Fortnightly Return in Form A (CRR) Under Section 42 (2) of the RBI Act, 1934, all SCBs are required to submit to Reserve Bank a provisional Return in Form 'A' within 7 days from the expiry of the relevant fortnight which is used for preparing press communiqu. The final Form 'A' return is required to be submitted to RBI within 20 days from expiry of the relevant fortnight. Based on the recommendation of the Working Group on Money Supply: Analytics and Methodology of Compilation, all SCBs in India are required to submit from the fortnight beginning October 9, 1998, Memorandum to form 'A' return giving details about paid-up capital, reserves, time deposits comprising short-term (of contractual maturity of one year or less) and long-term (of contractual maturity of more than one year), certificates of deposits, NDTL, total CRR requirement etc., Annexure A to Form A return showing all foreign currency liabilities and assets and Annexure B to Form A return giving details about investment in approved securities, investment in non-approved securities, memo items such as subscription to shares /debentures / bonds in primary market and subscriptions through private placement. For reporting in Form 'A' return, banks should convert their overseas foreign currency assets and bank credit in India in foreign currency in four major currencies viz., US dollar, GBP, Japanese Yen and Euro into rupees at the Foreign Exchange Dealers Association of India's (FEDAI) noon mean rate on reporting Friday. The present practice of calculation of the proportion of demand liabilities and time liabilities by SCBs in respect of their savings bank deposits on the basis of the position as at the close of business on 30th September and 31st March every year (cf. RBI circular DBOD.No.BC.142/09.16.001/97-98 dated November 19, 1997) shall continue in the new system of interest application on savings bank deposits on a daily product basis. The average of the minimum balances maintained in each of the month during the half year period shall be treated by the bank as the amount representing the "time liability portion of the savings bank deposits. When such an amount is deducted from the average of the actual balances

maintained during the half year period, the difference would represent the "demand liability portion. The proportions of demand and time liabilities so obtained for each half year shall be applied for arriving at demand and time liabilities components of savings bank deposits for all reporting fortnights during the next half year. 1.18 Penalties From the fortnight beginning June 24, 2006, penal interest will be charged as under in cases of default in maintenance of CRR by SCBs : (i) 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 three per cent per annum above the Bank Rate on the amount by which the amount actually maintained falls short of the prescribed minimum on that day and if the shortfall continues on the next succeeding day/s, penal interest will be recovered at the rate of five per cent per annum above the Bank Rate. (ii) 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. SCBs are required to furnish the particulars such as date, amount, percentage, reason for default in maintenance of requisite CRR and also action taken to avoid recurrence of such default. 2. Maintenance of Statutory Liquidity Ratio (SLR) Consequent upon amendment to the Section 24 of the Banking Regulation Act,1949 through the Banking Regulation (Amendment) Act, 2007 replacing the Regulation (Amendment) Ordinance, 2007, effective January 23, 2007, the Reserve Bank can prescribe the SLR for SCBs in specified assets. The value of such assets of a SCB shall not be less than such percentage not exceeding 40 per cent of its total DTL in India as on the last Friday of the second preceding fortnight as the Reserve Bank may, by notification in the Official Gazette, specify from time to time. SCBs can participate in the Marginal Standing Facility (MSF) scheme introduced by Reserve Bank with effect from May 09, 2011. Under this facility, the eligible entities may borrow overnight, up to one per cent of their respective NDTL outstanding at the end of the second preceding fortnight. Reserve Bank has specified vide notification DBOD.No.Ret.91/12.02.001/2010-11 dated May 09, 2011 that every SCB shall continue to maintain in India assets as detailed below, the value of which shall not, at the close of business on any day, be less than 24 per cent on the total net demand and time liabilities as on the last Friday of the second preceding fortnight as prescribed vide notification DBOD.No.Ret.BC.66/12.02.001/2010-11 dated December 16,

2010 valued in accordance with the method of valuation specified by the Reserve Bank of India from time to time: (a) Cash or (b) 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. ii. iii. iv. v. Dated securities issued up to May 06, 2011 as listed in the Annex to Notification DBOD.No.Ret.91/12.02.001/2010-11 dated May 09, 2011. Treasury Bills of the Government of India; Dated securities of the Government of India issued from time to time under the market borrowing programme and the Market Stabilization Scheme; 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.

Provided that the securities (including margin) referred to above, if acquired under the Reserve Bank- Liquidity Adjustment Facility (LAF), shall not be treated as an eligible asset for this purpose. Explanation: For the above purpose, "market borrowing programme" shall mean the domestic rupee loans raised by the Government of India and the State Governments from the public and managed by the Reserve Bank of India through issue of marketable securities, governed by the Government Securities Act, 2006 and the Regulations framed there under, through an auction or any other method, as specified in the Notification issued in this regard. 2. Encumbered SLR securities shall not be included for the purpose of computing the percentage specified above. Provided that for the purpose of computing the percentage of assets referred to hereinabove, the following shall be included, namely: i. securities lodged with another institution for an advance or any other credit arrangement to the extent to which such securities have not been drawn against or availed of; and, securities offered as collateral to the Reserve Bank of India for availing liquidity assistance from Marginal Standing Facility (MSF) up to one percent of the total NDTL in India carved out of the required SLR portfolio of the bank concerned.

ii.

3. In computing the amount for the above purpose, the following shall be deemed to be cash maintained in India:

i.

ii.

iii. Note:

The deposit required under sub-section (2) of Section 11 of the Banking Regulation Act, 1949 to be made with the Reserve Bank by a banking company incorporated outside India; Any balances maintained by a scheduled bank with the Reserve Bank in excess of the balance required to be maintained by it under Section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); and Net balances in current accounts with other scheduled commercial banks in India.

1. With a view to disseminating information on the SLR status of a Government security, it has been decided that: i. the SLR status of securities issued by the Government of India and the State Governments will be indicated in the Press Release issued by the Reserve Bank of India at the time of issuance of the securities; and, an updated and current list of the SLR securities is posted on the Reserve Bank's website .

ii.

2. The cash management bill will be treated as Government of India Treasury Bill and accordingly shall be treated as SLR securities. 2.1 Procedure for Computation of SLR The procedure to compute total NDTL for the purpose of SLR under Section 24 (2) (B) of B.R. Act, 1949 is broadly similar to the procedure followed for CRR. The liabilities mentioned under Section 1.11 will not form part of liabilities for the purpose of SLR also. SCBs are required to include inter-bank term deposits / term borrowing liabilities of all maturities in Liabilities to the Banking System. Similarly, banks should include their interbank assets of term deposits and term lending of all maturities in Assets with the Banking System for computation of NDTL for SLR purpose. 2.2 Classification and Valuation of Approved Securities for SLR As regards classification and valuation of approved securities, banks may be guided by the instructions contained in our Master Circular (as updated from time to time) on Prudential Norms for classification, valuation and operation of investment portfolio by banks. 2.3 Penalties If a banking company fails to maintain the required amount of SLR, it shall be liable to pay to RBI in respect of that default, the penal interest for that day at the rate of three per cent per annum above the Bank Rate on the shortfall and 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.

2.4 Return in Form VIII (SLR) i) Banks should submit to the Reserve Bank before 20th day of every month, a return in Form VIII showing the amounts of SLR held on alternate Fridays during immediate preceding month with particulars of their DTL in India held on such Fridays or if any such Friday is a Public Holiday under the Negotiable Instruments Act, 1881, at the close of business on preceding working day. ii) Banks should also submit a statement as annexure to Form VIII return giving daily position of (a) value of securities held for the purpose of compliance with SLR, and (b) the excess cash balances maintained by them with RBI in the prescribed format. 2.5 Correctness of Computation of DTL to be certified by Statutory Auditors The Statutory Auditors should verify and certify that all items of outside liabilities, as per the banks books had been duly compiled by the bank and correctly reflected under DTL/NDTL in the fortnightly/monthly statutory returns submitted to Reserve Bank for the financial year.

EMPLOYMENT OF FUNDS BY BANKS

The employment or investment of funds by a commercial bank means the safe utilization and profitable use of its funds. The bank obtains money from different sources and pays interest on them. It is the utmost desire of every commercial bank that it should invest its funds in a manner which serves its own as well as customer's interest. Its own interest is to earn profit for the shareholders. The other interest is of the customers along with interest as and when demanded by them. So the main activity is to maintain sufficient liquidity to meet any demands from depositors on a day-to-day basis. Banks also need liquidity to meet the demands of their borrowers. Failure to meet and liquidity requirements may lead to loss of confidence of the depositors and also loss of profitable business. So the first deployment of their funds should be in the form of reserves. These are the primary line of defence for banks in times of trouble. The two objectives of liquidity and profitability are obtained by utilizing the surplus funds into ready convertible securities. Reserve Problem: Too much of reserves leads to erosion of profits whereas too little reserves leads to liquidity crisis. Success depends on striking a balance between too much and too little reserves. Reserves should neither be unnecessarily large nor dangerously small. The amount of reserve has to depend on experience and sound common sense. It is difficult to lay down any hard

and fast rules as it depends on the needs of different classes of customers, and also varies from time to time. There are certain reserve demands which can be foreseen such as seasonal demands, for example, At the time of the diwali a festive season more people require liquid cash, withdrawals increase. When due dates of fixed deposits arise When central bank on government raises interest rates, Salary payment times of factories and businesses like the end of the month etc.

Factors which govern cash reserves

In reality it is not possible to lay down fixed principles regarding the fixation of cash reserves to liabilities by a bank. How much a bank should maintain cash reserves varies from time to time. However; the main factors governing cash reserves, in brief, are as under: (1) Legal Requirements. There are basic cash reserve requirements set down by the reserve bank of India, these include Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio(SLR). The object of legal cash requirements is two fold. Firstly, it safeguards the deposits of the people. Secondly, it is a credit control weapon with the Reserve Bank of India. (2) Nature and Size of Deposits. If the clients of the bank are industrialists, businessmen, brokers, the banks will have to keep large reserve to meet their daily demands for cash. The size of deposits kept by the customers also affects the cash reserve. In case the banks have a few large deposits of the customers, then a large cash reserve has to be maintained. In case the number of depositors of small amount is large, then lesser amount of cash reserve is to be held by the bank. (3) Nature of Advances and Investments. In case a bank uses major portion of its deposits in discounting bills the cash reserve ratio will be low. If the large portion of the funds is used in advances and loans which cannot be liquidated easily, larger cash reserve would be required by the bank. (4) Habits of customers. If customers make payments by use of cheques, then smaller amount of cash reserve will be kept. In case the payments are mostly made in cash, then the bank will keep larger cash reserve. (5) Facilities of Clearing House. If clearing house facility is available in a locality, then a smaller amount of cash reserve will be required as the bank will have to pay the difference of

the cheques drawn upon them and drawn upon other banks held by it. In the .absence of clearing housing, every transaction will be made in cash. So a large amount of cash reserve is to be maintained. (6) Banking Facilities. If the banking system is well established in the country, there will be large inflow and outflow of funds mostly through cheques. The banks will, therefore, keep a smaller portion of cash reserve. In case, the banking system is infancy, then adequate cash, reserve is to be maintained by the banks. (7) Area of Operation. The ratio of cash reserve also depends upon the area where the bank is situated. A bank situated in a city will keep more cash reserve than a bank situated in rural area where the demand for cash is only seasonal. (8) Political Conditions. If there is political stability leading to economic stability in the country, the banks will keep lesser cash reserves. The banks will keep higher reserves in case of economic instability.

Profitable uses of funds*

call loans and loans repayable at short notice investment in government and on the stock exchange securities loans and advances purchasing in discounting bills