22 August 2013
I read in a book that from the total money a bank receives as deposits, it keeps a portion of it as cash or bank balance... BANK BALANCE? so do commercial banks have accounts in other commercial banks or in RBI or both ?
18 July 2024
Commercial banks manage their liquidity and reserve requirements by holding balances in several forms, including cash, balances with other commercial banks, and reserves held at the Reserve Bank of India (RBI). Here’s how these components typically work:
### Components of Bank Balances:
1. **Cash Reserves:** - Commercial banks hold a portion of their deposits as physical cash in their vaults. This cash is used for day-to-day transactions, customer withdrawals, and other operational needs.
2. **Balances with Other Commercial Banks:** - Banks also maintain accounts with other commercial banks. These accounts serve various purposes such as interbank transactions (e.g., clearing and settlement), managing liquidity needs, and earning interest on surplus funds.
3. **Reserve Requirements at RBI:** - As per RBI regulations, commercial banks are required to maintain a certain percentage of their deposits as reserves with the RBI. These reserves are known as Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). - **CRR:** Banks must hold a specified percentage of their net demand and time liabilities (NDTL) as cash reserves with the RBI. CRR is a tool used by RBI to control liquidity in the banking system. - **SLR:** Banks are also required to maintain a certain percentage of their NDTL in the form of liquid assets like government securities, gold, or other approved securities. SLR serves as a cushion against liquidity risk.
### Accounts Held by Commercial Banks:
- **Accounts with Other Commercial Banks:** Banks maintain accounts with other commercial banks for various purposes, including settlement of transactions, managing cash flows, and earning interest on excess reserves.
- **Accounts with RBI:** - **Current Account with RBI:** Banks maintain a current account with RBI to facilitate transactions related to government transactions, interbank settlements, and regulatory compliance. - **Statutory Accounts (CRR and SLR):** Banks maintain accounts specifically for CRR and SLR requirements, ensuring compliance with RBI regulations.
### Importance of Balance Management:
- **Liquidity Management:** Balances held in various forms help banks manage liquidity efficiently, ensuring they can meet withdrawal demands and operational requirements without disruptions.
- **Regulatory Compliance:** Banks must adhere to RBI regulations regarding reserve requirements (CRR and SLR) and maintain adequate balances to support their lending and deposit activities.
In conclusion, commercial banks manage their deposit inflows by maintaining balances in cash, accounts with other commercial banks, and reserves with the RBI (CRR and SLR). These balances play a crucial role in ensuring financial stability, regulatory compliance, and effective management of liquidity within the banking system.
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