Calculating NDTL & CRR – in Practice

So in my last post titled “CRR: How to calculate Net Demand and Time Liabilities (NDTL) – the Theory”, I covered all the theory behind the NDTL calculation for CRR purposes. In this post, we’ll do a real-life numerical illustration in true Nerdverve “Ishstyle”.

Provided below is the same table that we included in the previous post - 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 (for CRR) outstanding as on September 4th.

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.  

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Remember (from our previous post), 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), when “Liabilities to the Banking system” – “Assets with the Banking system”> 0.

If “Liabilities to the Banking system” – “Assets with the Banking system” < 0, then NDTL = Liabilities to Others in India.

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Now, from this NDTL figure obtained above, we need to subtract the following items that are exempted from CRR maintenance. (Please read my previous post for detailed explanations on all these exempted items)

1.    While calculating the “Net inter-bank liabilities” (“Liabilities to the Banking system” – “Assets with the Banking system”), 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”.

2.    Credit balances in Asian Clearing Union (US$) Accounts.

3.    Demand and Time Liabilities of banks’ Offshore Banking Units (OBU)

4.  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.

5.  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.

Detailed data that would allow us to exclude the exempted items above from our NDTL calculation is not provided in the RBI’s WSS and other public releases. Banks however obviously possess all this information for their own operations. They subtract the exempted items from the NDTL calculated in the formula above, to get the precise NDTL for CRR maintenance purposes.

NDTL as on Sep 4th used to calculate CRR funds requirement for fortnight of Sep 19th – Oct 2nd 

Per RBI regulations, every alternate Friday, banks have to release certain data on their assets, liabilities, operations etc. These alternate Fridays are called “Reporting Fridays”. The period starting from the Saturday immediately following a Reporting Friday, all the way to the next reporting Friday is called “Reporting fortnight”. Let’s clarify with a real life example. The month of Sep 2015 had two reporting Fridays (see the calendar snapshot provided below) – the 4th and the 18th. The two reporting fortnights in the month were 5th -18th Sep and 19th Sep – 2nd Oct (this one included the first couple of days of October).

CRR maintenance happens with a fortnight’s lag. This means that CRR is maintained on the NDTL of the reporting Friday of the second preceding fortnight. For instance, for the reporting fortnight 19th Sep – 2nd Oct, CRR is maintained on the NDTL as on 4th Sep – the reporting Friday of the 2nd preceding fortnight (22nd Aug – 4th Sep).

This is why we are going to use the NDTL as on Sep 4th to calculate the funds requirement for CRR maintenance for the fortnight of 19th Sep -2nd Oct. 

Funds required for CRR maintenance during fortnight of 19th Sep -2nd Oct?

The NDTL we calculated above (Rs 97,341.5 Bn as on Sep 4th) is not adjusted for CRR exemptions. Lets use it however, to do a rough calculation of the CRR funds requirement for the fortnight of 19th Sep – 2nd Oct. CRR was 4%, hence the funds required for CRR maintenance were = 4% * 97,341.5 = Rs. 3,894 Bn. 

Note: The precise CRR funds requirement for a reporting fortnight is provided in the WSS released on the Friday following that fortnight. This supplement also includes the actual cash balances maintained by banks (with the RBI) during the fortnight. For instance, the CRR requirement for the fortnight of 19th Sep – 2nd Oct was provided in table no. 3 of the WSS released by the RBI on Oct 9nd (please see exhibit below). It was = Rs. 3,682.5 Bn. 

Our rough estimate of the cash reserve requirement was ~6% higher than the actual figure. Not bad I say! (given that we worked with incomplete data) 

We can work backward and calculate the actual NDTL figure (for CRR purposes) as on Sep 4th by dividing 3,682.5 by 4%, which gives us Rs. 92,062.5 Bn. 

How CRR is maintained in practice

We know from the data above that the daily CRR funds requirement for the fortnight of Sep 19th – Oct 2nd was Rs 3,682.5 Bn. This means that for the entire 14 day period, banks had to maintain total funds (adding up cash reserve reserves maintained on each of the 14 days) of Rs 3,682.5 Bn * 14 = Rs. 51,555 Bn. 

Per current guidelines, all banks are required to maintain a minimum CRR balance of 95% of the average daily reserves required for the fortnight, on all days of the fortnight. This means that banks were required to maintain at least Rs. 3,498.4 Bn (95% of 3,682.5) in cash reserves with the RBI every day of the fortnight in question, in addition to fulfilling the total funds requirement of Rs. 51,555 Bn for the fortnight. 

Lets assume that banks maintained the minimum balance of Rs. 3,498.4 Bn (95% of requirement) on the first 13 days of the fortnight. This means that on the last day of the fortnight, they would have to maintain a cash balance of (51,555 – 3,498.4 * 13) = Rs 6,076.1 Bn. 

In the table above, you can see that the total cash balances maintained with the RBI during the fortnight (adding all 14 days) were = Rs 52,605.4 Bn. This was Rs 1,050 Bn more than what was required for CRR maintenance over the 14 days.

This was the case because the banking system was in an excess liquidity situation. This fact is underscored by the tables provided below from the RBI's Weekly supplements (table no. 8 “Liquidity Operations of by the RBI) – they show the net absorption of liquidity by the RBI from the banking system through its Reverse Repo and Open Market Operations during the fortnight in question. Including the 19th of Sep (not shown in the tables below), the RBI absorbed a total of Rs. 224 Bn from the banking system during the fortnight.

In a tight liquidity situation, the cash balances maintained with the RBI would normally not have been in excess of the CRR requirement.