CRR: How to calculate Net Demand and Time Liabilities (NDTL) – the Theory

I usually promise to do follow-up posts and end up getting distracted by all the ideas fighting each other for brain space (there really isn’t very much) in my head. End result – a totally unrelated new post.

But not this time. (Those ADD pills must be working)

This indeed is a post related to CRR/SLR.

Being the nerd that I am, I’ve always wanted to know how the CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) are calculated for Scheduled Commercial Banks (SCBs). The numerators in these ratios are quite easily sourced from the RBI’s Weekly Statistical Supplement (WSS). It’s the denominator, the “Net Demand and Time Liabilities” (NDTL) of SCBs that is tricky to calculate. Let’s get right to it then.

Provided below is table number 4. “Scheduled Commercial Banks – Business in India” from the RBI’s WSS published on Sep 18th 2015. We’ll use the information in this table to calculate NDTL for SCBs outstanding on September 4th. (Note: this data is published with a fortnight’s lag).

Net Demand and Time Liabilities (NDTL)

Per the RBI Act, 1934 (Section 42), NDTL for the banking system is =

Liabilities to Others in India (#2 in table above) + Liabilities to the Banking system (#1 in table above) – Assets with the Banking system (#5 in table above)

Note: NDTL is = the formula above only when Liabilities to the Banking system > Assets with the banking system. If this is not the case and Liabilities to the Banking system < Assets with the Banking system, then NDTL is simply = Liabilities to Others in India.

From the table above (as on Sep 4^th):

Liabilities to Others = Rs. 97,341.5 Bn  (90, 280.5 + 2,380.2 + 4,680.8)

Liabilities to the Banking system = Rs. 1,806 Bn  (1,267.5 + 470.4 + 68.1)

Assets with the Banking system = Rs. 2583 Bn (1,772.1 + 207.7 + 232.8 + 370.4)

Since Liabilities to the Banking system are < Assets with the Banking system, NDTL = Liabilities to Others = Rs 97,341.5 Bn.  

I know exactly what you’re thinking right now - What’s so tricky about that? Right?

Read on....

The complication – NDTL calculation differs for CRR and SLR

The exact calculation of NDTL is slightly different for CRR and SLR. The difference lies in what is exempt i.e. the liabilities that a bank does not have to maintain CRR or SLR on.

Banks are exempt from maintaining CRR on the following...

.... meaning that they are NOT included in the NDTL calculation for CRR purposes.

1. Liabilities to the banking system in India.
2. Note: for CRR purposes, SCBs should not 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”. 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”.
3. Credit balances in Asian Clearing Union (US$) Accounts.
4. Demand and Time Liabilities in respect of their Offshore Banking Units (OBU).
5. The eligible amount of incremental FCNR (B) and NRE deposits of maturities of three years and above from the base date of July 26, 2013, and outstanding as on March 7, 2014, till their maturities/ pre-mature withdrawals.
6. Minimum of Eligible Credit (EC) and outstanding Long Term Bonds (LB) to finance infrastructure loans and affordable housing loans, as per the circular DBOD.BP.BC.No.25/08.12.014 /2014-15 dated July 15, 2014.

In English Please!

A very reasonable request since there were a lot big words, acronyms and jargon in the exemptions section above. Let’s demystify this section point by point.

• Lets start with the first 2 points. We know that NDTL = Liabilities to Others in India + (Liabilities to the Banking system – Assets with the Banking system), if “Liabilities to Banking system” > “Assets with the Banking system” or “Net Liabilities to the Banking system” are > 0. If not, then NDTL = “Liabilities to Others in India”. 

When calculating NDTL for CRR purposes, from the “Liabilities to the Banking system”, inter-bank term deposits /term borrowing liabilities of original maturities of 15 days and above and up to one year need to be excluded. Similarly, from “Assets with the banking system”, inter-bank term deposits and term lending of original maturity of 15 days and above and up to one year, need to be removed. Basically, we remove term liabilities and assets of 15 days – 1 year from the liabilities and assets side while calculating “ Net Liabilities to the Banking system”.

• Lets now consider point 3. The Asian Clearing Union (ACU) was established in ’74. The main objective of the ACU is to facilitate payments among member countries for eligible transactions on a multilateral basis, thereby economizing on the use of forex reserves and promoting trade among members. The Central Banks of Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Pakistan and Sri Lanka are members of the ACU. Normally, ACU accounts are used to settle payments for export / import transaction between ACU member countries on deferred payment terms, subject to certain restrictions. Credit balances in ACU accounts in India are exempt from CRR maintenance, hence are subtracted for the NDTL calculated from the formula above.

• Moving on to point no. 4, “Offshore banking” refers to banking operations that cover non-residents.  An Offshore Banking Unit (OBU) is the branch of a bank located abroad or in the case of Indian banks, an OBU can also be located in a special economic zone (SEZ) within India and function under a special set of rules for encouraging exports from the SEZ. It is a "deemed foreign branch" of the parent bank and carries out international banking business involving foreign currency denominated assets and liabilities. While OBUs can raise funds from foreign currency deposits of non-residents (including NRIs), they cannot accept local currency deposits from residents. The demand and time liabilities of OBUs of Indian banks are exempt from CRR maintenance, and hence  subtracted for the NDTL calculated in the formula above.

• Lets move on to point no. 5. A Foreign Currency Non-Resident Bank [FCNR (B)] deposit is a term deposit account that can be maintained by NRIs and PIOs in foreign currency. A Non-Resident (External) Rupee (NRE) Account is one opened by an NRI in foreign currency that allows him/her convert the foreign currency into INR and repatriate funds to/transfer funds out of India.

Earlier, banks were required to include all FCNR (B) and NRE deposit liabilities for computation of NDTL and for maintenance of CRR. Then, starting from the fortnight beginning August 24, 2013, incremental FCNR (B) and NRE deposits with reference base date of July 26, 2013, and having maturity of 3 years and above, mobilised by banks were exempted from the maintenance of CRR and SLR. This meant, if a bank had a total FCNR (B) and NRE deposit base of say Rs. 100 as on July 26, 2013, and mobilized incremental deposits of Rs. 20, then that portion of Rs. 20 which had a maturity of 3 years and above, would not be included in NDTL and would qualify for CRR and SLR exemption.  Early last year however, from the reporting fortnight beginning March 8, 2014, the RBI announced that the exemption granted on incremental FCNR (B)/NRE deposits from maintenance of CRR/SLR was withdrawn. Now only incremental FCNR (B) and NRE deposits of maturities of three years and more mobilised between Jul 26, 2013 and Mar 7, 2014 qualify for the exemption from maintenance of CRR reserves.

• Finally, we move to point no. 6. In July 2014, in order to encourage banks to finance infrastructure loans and affordable housing loans, the RBI allowed eligible amounts under these categories to be exempt from the CRR requirement.  The details are provided in their circular DBOD.BP.BC.No.25/08.12.014 /2014-15 dated July 15, 2014.

Phew! This post has become much longer than I’d imagined....I’m going to save the more numerical part/ actual calculation of NDTL for our next post.