Cooperative bank's reserve squeeze
The Sundargarh District Central Cooperative Bank has net demand and time liabilities (NDTL) of ₹400 crore. Deposits are ₹380 crore and other borrowings ₹20 crore. It holds cash ₹18 crore and approved government securities ₹70 crore. The RBI's CRR is 4 per cent and SLR is 18 per cent. A local self-help group default has triggered rumours; in one week depositors withdraw ₹30 crore. The bank's loan book is ₹340 crore, mostly short-term crop loans that cannot be recalled before harvest. The manager has three options: borrow from the RBI's repo/MSF window at 6.5 per cent, sell government securities in the market at a loss of 2 per cent, or borrow overnight from a large commercial bank at 7.5 per cent. He asks whether the bank was compliant before the run and how to meet the withdrawal without a fire sale.
1. Calculate the bank's required CRR and SLR, and its excess or shortfall before the withdrawal.
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CRR is 4 per cent of NDTL ₹400 crore = ₹16 crore. The bank holds cash of ₹18 crore, so it has excess cash reserves of ₹2 crore above the CRR requirement. SLR is 18 per cent of ₹400 crore = ₹72 crore. The bank holds approved government securities of ₹70 crore, so it is short of the SLR requirement by ₹2 crore. Thus the bank was not fully SLR-compliant even before the run, although it had a small cash cushion for CRR. The two ratios are not interchangeable: cash cannot be counted for SLR, and approved securities cannot be counted for CRR. The manager should treat the ₹2 crore SLR shortfall as a separate regulatory problem to be corrected, not as part of the emergency liquidity response.
2. Trace the balance-sheet effect of the ₹30 crore withdrawal and advise on the least-cost way to meet it.
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After the withdrawal, NDTL falls to ₹370 crore, so required CRR = ₹14.8 crore and required SLR = ₹66.6 crore. If the bank paid ₹30 crore from its ₹18 crore cash, cash would be negative; it must raise funds. Selling ₹30 crore of securities would restore cash to ₹18 crore, but securities would fall to ₹40 crore, leaving an SLR shortfall of ₹26.6 crore; the 2 per cent loss is also a real cost. Borrowing ₹30 crore from the RBI repo/MSF window adds cash, pays the depositors, and leaves securities at ₹70 crore, which is above the new SLR requirement of ₹66.6 crore. The interest cost at 6.5 per cent for a short period is smaller than the securities loss and the commercial-bank rate of 7.5 per cent. So repo/MSF is the least-cost option, subject to eligible collateral and the bank quickly correcting its SLR position.
3. If many district banks face the same run, what happens to district credit and the money supply? Should the RBI cut CRR or inject liquidity?
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A deposit withdrawal reduces bank reserves. With a 4 per cent CRR, the simple deposit multiplier is 1 / 0.04 = 25, so a ₹30 crore reserve loss could contract deposits by up to ₹750 crore if banks held no excess reserves and the public held no extra cash. In practice the fall is smaller, but the direction is clear: banks call loans, ration new credit, and crop loans are hit first because they are hard to recall. The money supply falls as deposits contract. If the problem is panic at solvent banks, a targeted repo/MSF injection is better: it supplies liquidity without permanently changing the multiplier. A CRR cut frees reserves for all banks and lowers the cost of credit, but it can be inflationary and may not reach the affected banks quickly. A blanket CRR cut is more appropriate if the shortage is system-wide.