The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India is called as _________.
Understanding the Banking Terminology
The question asks about a specific requirement for banks regarding maintaining a balance with the Reserve Bank of India (RBI) based on a percentage of their Net Demand and Time Liabilities (NDTL). Let's break down the terms to understand the correct answer.
What are Net Demand and Time Liabilities (NDTL)?
NDTL represents the total deposits and borrowings of a bank from the public and other banks, minus the deposits and borrowings the bank has with other banks. It's essentially the total liabilities of a bank that it owes to others.
Analyzing the Given Options
Let's look at each option provided:
- Cash Reserve Ratio (CRR): This is the percentage of NDTL that banks must maintain as an average daily balance with the Reserve Bank of India. The purpose is to ensure liquidity and control credit.
- Repo Rate: This is the interest rate at which the Reserve Bank of India lends money to commercial banks, usually against government securities. It is a monetary policy tool to control liquidity and inflation.
- Reverse Repo Rate: This is the interest rate at which the Reserve Bank of India borrows money from commercial banks. Banks park their excess funds with the RBI at this rate. It's also a monetary policy tool.
- Statutory Liquidity Ratio (SLR): This is the percentage of NDTL that banks must maintain in the form of specified liquid assets. These assets include cash, gold, and investments in government securities. This balance is held by the bank itself, not with the RBI.
Connecting the Description to the Correct Term
The question specifically mentions the average daily balance that a bank is required to maintain with the Reserve Bank as a share of a percentage of its Net Demand and Time Liabilities (NDTL). Comparing this description with the definitions above:
- CRR directly matches the description: it is a percentage of NDTL held as a balance with the RBI.
- Repo Rate and Reverse Repo Rate are interest rates for borrowing/lending, not a required balance of NDTL held with RBI.
- SLR is a percentage of NDTL held in liquid assets by the bank itself, not with the RBI.
Therefore, the term that precisely fits the description provided in the question is the Cash Reserve Ratio.
Conclusion
The average daily balance that a bank is required to maintain with the Reserve Bank as a share of a specified per cent of its Net demand and time liabilities (NDTL) is called the Cash Reserve Ratio (CRR).
| Term | Description | Held With |
|---|---|---|
| Cash Reserve Ratio (CRR) | % of NDTL | Reserve Bank of India (RBI) |
| Statutory Liquidity Ratio (SLR) | % of NDTL in specified liquid assets | The Bank itself |
| Repo Rate | Interest rate on borrowing from RBI | N/A (Interest Rate) |
| Reverse Repo Rate | Interest rate on lending to RBI | N/A (Interest Rate) |
Revision Table: Key Banking Ratios
| Ratio/Rate | Purpose | Impact |
|---|---|---|
| Cash Reserve Ratio (CRR) | Liquidity management, credit control | Higher CRR > Less money for banks to lend |
| Statutory Liquidity Ratio (SLR) | Maintain bank solvency & liquidity | Higher SLR > Less money for banks to lend |
| Repo Rate | RBI lends to banks | Influences interest rates on loans |
| Reverse Repo Rate | RBI borrows from banks | Influences bank's incentive to park funds with RBI |
Additional Information: Role of RBI in Monetary Policy
The Reserve Bank of India (RBI) uses several tools to manage liquidity, credit, and inflation in the economy. These tools are part of its monetary policy. CRR and SLR are examples of reserve requirements, while Repo Rate and Reverse Repo Rate are examples of policy rates. By adjusting these rates and ratios, the RBI influences the lending behavior of banks, which in turn affects economic activity.
- Changing the CRR directly affects the amount of funds available with banks for lending to customers.
- SLR ensures that banks hold a certain buffer of easily encashable assets.
- Repo and Reverse Repo rates influence the cost of funds for banks, impacting their lending rates.
Understanding these instruments is crucial for comprehending how the central bank manages the money supply and credit flow in the economy.
Important Questions from Basic Banking Concepts
______ is the rate of interest commercial banks have to pay to RBI if they borrow money from it in case of shortage of reserves.
The account maintained by a businessman with his bankers is known as
Bull' and 'Bear' are associated with which of the following commercial activities?
What is the meaning of 'Take off stage' in an economy?
A ______ is a paper instructing the bank to pay a specific amount from the person’s account to the person in whose name the paper has been issued.
