Capital Adequacy Ratio (CAR):
CAR is a measurement of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures. It foretells a bank’s ability to absorb losses using its own capital.
Shadow banking refers to unregulated activities by regulated institutions. The shadow banking system creates credit across the global financial system through a group of financial intermediaries whose members are not subject to regulatory oversight. Examples of intermediaries not subject to regulation include hedge funds, unlisted derivatives, and other unlisted instruments, while examples of unregulated activities by regulated institutions include credit default swaps.
Non-performing loans/Assets (NPAs):
NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. NPAs can be classified as a ‘substandard asset’, ‘doubtful asset’, or ‘loss asset’, depending on the length of time overdue and probability of repayment.
Cash Reserve Ratio (CRR):
CRR is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. The aim is to ensure that banks do not run out of cash to meet the payment demands of their depositors. It is a crucial monetary policy tool and is used for controlling money supply in an economy.
Statutory Liquidity Ratio (SLR):
SLR is the ratio of liquid assets to net demand and time liabilities (NDTL). Every bank must have a minimum portion of their NDTL in the form of cash, gold, or other liquid assets by the day’s end. SLR is a monetary policy tool instrumental in ensuring the solvency of the banks and flow of money in the economy. Its increase constricts banks’ ability to inject money into the economy.
Open Market Operations (OMO):
OMO is the sale and purchase of government securities and treasury bills by the central bank (RBI). The objective of OMO is to regulate the money supply in the economy. It’s a monetary policy tool. When RBI wants to increase money supply in the economy it purchases the government securities from the market, and vice versa. OMO is carried out through commercial banks and not public.
The Bank Rate is the rate at which the Central Bank discounts the bills of commercial banks. In bank rate there is no need for collateral security. The loans are usually short-term loans lasting for just a day, or even just overnight. Lower bank rates can help expand the economy by lowering the cost of funds for borrowers, and higher bank rates help to contain inflation.
Repo rate is actually a repurchase agreement, and refers to the rate at which a commercial bank sells security to Central Bank to raise money. It promises to buy back the same security from RBI at a predetermined date with an interest at the repo rate. It allows the central bank to control liquidity, money supply, and inflation level in the country. To decrease the money supply in the economy, the RBI will hike up the repo rate to discourage banks from borrowing funds. With fewer funds available with them, they have less to offer to the customers.
Reverse repo rate:
Reverse repo rate is the interest offered by RBI to banks who deposit funds into the treasury. For instance, when banks generate excess funds, they may deposit the money with the central bank. So, the interest earned on the deposited funds is known as the reverse repo rate.
Non-bank financial companies (NBFCs):
In India, NBFC is a company registered under the Companies Act, 1956. They are financial institutions that offer various banking services like lending, making investments, currency exchange, underwriting etc. Their activities are akin to that of banks; but do not have a banking license. Unlike in case of banks, NBFC cannot accept demand deposits; NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on it; deposit insurance facility of DICGC is not available to depositors of NBFCs. These limitations keep NCFCs outside the scope of conventional oversight from financial regulators.
Gross Domestic Savings Rate:
Gross Domestic Saving is GDP minus final consumption expenditure. This rate is expressed as a percentage of GDP. Gross Domestic Saving consists of savings of household sector, private corporate sector and public sector. Major reasons for decline in the rate of gross domestic savings include; moderation in profit of the private corporate sector, greater dissaving of public authorities, decline in household savings, in particular, financial savings, largely on account of persistent inflation.
Current Account Deficit (CAD):
CAD is slightly different from Balance of Trade (BoT), which measures only the gap in earnings and expenditure on exports and imports of goods and services. While CAD also factors in the payments from domestic capital deployed overseas. Current Account = Trade gap + Net current transfers + Net income abroad. A country with rising CAD shows that it has become uncompetitive, and investors are not willing to invest there.
Asset Quality Review (AQR):
Typically, RBI inspectors check bank books every year as part of its annual financial inspection (AFI) process. However, a special inspection was conducted in 2015-16. This was named AQR. In AQR the sample size of loans inspected is much bigger than AFI. These inspections check if asset classification is in line with the loan repayment and given prudential norms. Assets classification requires concerned loans to be identified and classified as non-performing.
The mess in India’s financial system lies at the heart of India’s slowdown today. The opacity around asset quality has led to a spike in the risk premium, nullifying the effect of RBI’s successive rate cuts. RBI can undertake an ‘asset quality review’ of the banking sector, similar to the one conducted for banks in 2015, to improve the sector and increase its funding. It would also be a good approach for RBI to open, and allow new entities to come into the banking system. This will have a good effect in terms of efficiency and technology induction.