“THE ROLE OF FINANCIAL INDICATORS

IN THE BANKING SYSTEM”

FINANCIAL INDICATORS AND THEIR
ROLE IN BANKING SYSTEM

 In this fast changing world of LPG where hundreds of “Lehman

Brothers” became bankrupt within a fraction of moment, it has became
necessary to look in to the financial market and towards the financial
indicators to formulate proactive as well as reactive strategies.

 Some of the most effective indicators playing an important role in the

banking system are:
1.The Cash Reserve Ratio (CRR)
2.The Statutory Liquidity Ratio (SLR)
3.The Bank Rate
4.Repo Rate and Reverse Repo Rate
Cont..

5.Capital Adequacy Ratio

6.Prime Lending Rate (PLR)
7.Call Rate
8.Coupon Rate
9.The MIBID and MIBOR
10.Priority Sector Lending (PSL)
11.Gold Price
12.Gross Domestic Product (GDP)
13.Exchange Rate
14.Rate of Inflation
15.Rate of Savings
16.Stock Market Indices
1.CASH RESERVE RATIO (CRR)
Currently 6 %

 CRR is the amount of cash reserve that is required to be maintained by every bank in India,
(other than a scheduled bank) by way of cash reserve either with itself or in current with
RBI, SBI, or any other notified bank or partly with itself and partly in such current account.
 It is computed as a percentage on the total Demand and Time Liabilities (DTL) of the bank.
 It’s a statutory requirement stipulated under section 18 of the Banking Regulation Act,1949.

Role of CRR:
 If the RBI wants to put a check on credit expansion, it raises the CRR, conversely when it is
required to induce, to facilitate credit expansion, the CRR is lowered.
 It’s a technique that is used by RBI as a monetary instrument to control the money supply
in the economy.
At the time of inflation, to curtail money supply from the economy the CRR is increased and
at the time of deflation to provide much money to the economy the CRR is minimized.
 High CRR is resulting in impounding the cash resources of the banks and their ability to
expand credit.
2.STATUTORY LIQUIDITY RATIO (SLR)

 Statutory Liquidity Ratio or SLR refers to the amount that all

banks require to maintain in cash or in the form of Gold or
approved securities (Unencumbered approved securities like
bond and shares of different companies including Government
securities or Gilts priced by RBI).
 Presently the SLR is 25%
 SLR plays an important role to restrict the expansion of bank
credit.
 To augment the investment of the banks in Government
securities.
 To ensure solvency of banks by maintaining liquidity.
3. BANK RATE

 Bank Rate, also referred to as the discount rate, is the rate of

interest which a central bank charges on the loans and
advances that it extends to commercial banks and other
financial intermediaries.
 Changes in the bank rate are often used by central banks to
control the money supply.
 A central bank adjusts the supply of currency within national
borders by adjusting the bank rate.
 When the central bank reduces the bank rate, it increases the
attractiveness for commercial banks to borrow, thus increasing
the money supply and vice-versa.
4.REPO RATE &REVERSE REPO RATE

 Repos are classified as a money-market instrument that is

usually used to raise short-term capital.
 In shortage of funds they can borrow it either from Reserve
Bank of India |RBI] or from other banks. The repo rate is the
rate at which the banks borrow these excess funds. A reduction
in the repo rate will help banks to get money at a cheaper rate.
When the repo rate increases borrowing from RBI becomes
more expensive.
 In a reverse repo Reserve Bank borrows money from banks by
lending securities. The interest paid by Reserve Bank in this
case is called reverse repo rate.
5. CAPITAL ADEQUACY RATIO

 Capital adequacy ratio (CAR), also called Capital to Risk (Weighted) Assets
Ratio (CRAR), is a ratio of a bank's capital to its risk. National regulators track a
bank's CAR to ensure that it can absorb a reasonable amount of loss and are
complying with their statutory capital requirements.
 There are two types of capital which are measured:
Tier one capital: which can absorb losses without a bank being required
to cease trading.
Tier two capital:which can absorb losses in the event of a winding-up and
so provides a lesser degree of protection to depositors.
 Capital adequacy ratio is the ratio which determines the capacity of the bank in
terms of
 meeting the time liabilities and other risk such as credit risk, operational risk,
etc.
6.PRIME LENDING RATE (PLR)

 Prime lending rate is the rate of interest at which banks lend to their credit-worthy or
favoured customers. It is treated as a benchmark rate for most retail and term loans.

 The RBI does not set these rates, but in a broad way stipulates the interest rates in
the economy. The banks are at liberty to lend at a rate above or below the RBI’s.
The PLR is influenced by RBI’s policy rates — the Repo rate and cash reserve ratio

 Excessive money in the economy leads to inflationary trends. To control inflation,

government may curb the money supply by increasing the lending rates or PLR.
When RBI increases the PLR, banks may follow suit, making borrowing a costlier
affair. This hike in lending rates is bound to negatively impact businesses/industries
which depend on banks for their working capital and expansion requirements.

 A lower rate increases liquidity by making all loans (fixed or floating) less expensive
and therefore, easier to access.
 Normally, deposit rates follow lending rates. When lending rates fall, one can expect
a slash in deposit rates from banks too.
7. CALL RATE

 Call Rate refers to the interest rate on short-term secured loans

that can be called, or cancelled, by giving a 24-hour notice. It is
the inter-bank interest rate on funds that are not deposited for a
fixed period.

 The fluctuations in the call rate makes the short-term credits

cheap or costly ultimately affecting the corporate as well as the
trading firms to charge more on their products as indirect cost.
Hence, it increases the cost of production and the price of the
product as well.
8.COUPON RATE

 The coupon or coupon rate of a bond is the amount of interest

paid per year expressed as a percentage of the face value of
the bond. It is the interest rate that a bond issuer will pay to a
bondholder.
 There is a direct relationship between bank deposits and the
coupon rate. When the coupon rate at quite more, then people
will not go for depositing their money in their saving accounts.
Hence, the revenue of the banks hamper.
 In the case where the coupon rate is quite low, no one will go
for investing in debt instruments and will deposit in their bank
accounts enhancing the liquidity of the bank.
9. THE MIBID AND THE MOBOR

 The MIBID stands for Mumbai Inter-Bank Bid Rate where as MI

BOR stands for Mumbai Inter-Bank Offer Rate.
 The MIBID/MIBOR is a rate that is fixed by commercial banks
for giving over-night
 credits from its surplus deposits to the banks which have deficit
to balance the trading of the day. Generally, it is provided for a
night (24 hours).
 These are used as bench mark rate for majority of deals struck
for Interest Rate Swaps, Forward Rate Agreements, Floating
Rate Debentures and Term Deposits.
10. PRIORITY SECTOR LENDING

 Some areas or fields in a country depending on its economic condition or government

interest are prioritized and are called priority sectors i.e industry, agriculture and banks are
directed by the central bank or government that loans must be given on reduced interest
rates with discounts to promote these fields. Such lending is called priority sector lending.
 Due to such provisions, the banks provide credit to the under-developed sectors at a
lower rate which affects the profitability of the banks increasing their default/credit risk.
 There is much possibility of NPA ( Non-Performing Asset) making the banks’ balance
sheet not so attractive.
 On a contrary, due to PSL the bank is able to catch all sectors of the economy by
increasing its revenue and stability. It contributes a lot for the equitable and sustainable
development of the economy.
 If the PSL will be more then to divert the loss and risk occurred by such lending the
banks may increase their bank rates that will ultimately affect the banking system
making the borrowing more costly.
11. GOLD PRICE

 As Indians have a sentimental relation with gold, a

mare fluctuation in gold price affects the entire
economy.
 When people find that the gold price is at a minimum
stage, they buy gold by using the savings account
balance even if by taking loans.
 So at this point of time, by considering other points
the banks may regulate their rates and policies to
cope such situation.
12.
GROSS DOMESTIC PRODUCT (GDP)

 GDP is a basic measure of a country's economic performance and is the market value of
all final goods and services made within the borders of a nation in a year.
 It is a fundamental measurement of production and is very often positively correlated
 with the standard of living.
 It can be calculated as:
 GDP = private consumption + gross investment +
 government spending + (exports − imports)
 More GDP indicates better standard of living. It Shows that there is much more
 production in the economy and the economic condition of the people is good.
 If so, then no one will go for taking loan from banks. Ultimately, the banks will go for
 reducing the bank rate as there is a little demand for taking loans in the market.
 In a nut-shell, the revenues of the banks will reduce, but there is a possibility of increase
 in long term loans for growth and development.
13. EXCHANGE RATE

 The Exchange Rate (also known as the Foreign-exchange rate or

Forex rate or FX rate)
between two currencies specifies how much one currency is worth in
terms of the other.
 It is the value of a foreign nation’s currency in terms of the home
nation’s currency.
 When the exchange rate reduces indicating appreciation in the home
currency, the banks will find it cheap to bring money from the
overseas. As a result the liquidity position and availability of cash will
increase with the bank increasing its solvency and credit giving
capacity.
 At the time of appreciation of home currency, the importers find it the
right time to settle their outstanding with foreign parties. So the banks
should make provision for excess amount to face the situation.
14. RATE OF INFLATION
 The inflation rate is a measure of inflation, the rate of increase of a price index (for
example, a consumer price index.It is the percentage rate of change in price level over
time.
 In case of inflation, there is a rise in the general level of prices of goods and services in
an economy over a period of time. When the price level rises, each unit of currency buys
fewer goods and services.
 In the case of high inflation, people need more money for their livelihood. So more
people will go for taking loan.
 Controversially, at the time of inflation there is much more money in the economy than
the demand. So, no one will go for loan. So to attract borrowers, the bank has to think to
reduce the bank rate.
 On the other hand, if there is deflation when there is a scarcity of money in the economy
to purchase the products, to cope with the situation the interest rate on deposites is
increased to attract more and more deposites.
 In case of high deflation, the banks have to take loans from the central bank and act as a
stimulator by providing finance to all the suffered sectors to tackle the unfavourable
economic condition.
15. THE SAVINGS RATE

 Savings Rate refers to the amount that a common man saves per Rs.100 of his
earnings.
 If the savings rate will be more, then a huge liquidity can be found out in the
economy. As everyone have some savings, people will not go to banks to take
loans. As a result, the interest rate on various loans will decrease by making the
bank loans cheap.
 To attract more savings to be deposited in it, the banks increase the interest rate on
deposits.
 If the saving rate is high, it can be concluded that the consumption has been
minimized.It means there is a increase in the exports if the production remains
constant. Ultimately due to more export the foreign reserve will increase and the
exchange rate of the foreign
currencies will decrease due to appreciation of the Indian Rupee.
 Due to this appreciation the commercial banks can avail foreign currency loans at a
cheaper rate. On the other hand, if the savings rate is very low/negative, it means
people spent more than their income then the banks will increase their interest rates
to give loans as people want much money to spent.
16. STOCK MARKET INDICES

 A common man holding a bag full of cash while going to the bank to deposit in his
account if finds that the stock market is growing and there is a possibility of getting
much return by investing on that; he is a full who believes that the man will deposit
with the bank after knowing that.
 When the stock market indices show a bullish trend, people hesitate to deposit in
bank
accounts with a nominal return. It affects the Cash inflow of the bank.
 At the time of bearish trend, investors don’t want to loose more. They used to close
their
position and safeguard their investment in their bank accounts. It increases the cash
inflow of the bank.
 Corporate houses similarly when found that the market is booming, they hesitate to
take
long-term loans from banks for their expansion and diversification. Rather they go
for
fresh issue of equity shares at a high premium.
Thank You