RBI-Central Banking glossary: Ratios of assets/ capital

CRR (Cash Reserve Ratio):
CRR is the minimum percentage of total deposits of customers in a commercial bank held as reserves either in the form of cash or deposit in a specified current account with central bank of the country (RBI in India) as per the mandatory guidelines of central bank of the country.
How CRR and SLR impact on bank credits?

SLR (Statutory liquidity ratio):
The ratio of liquid assets to net demand and time liabilities (NDTL) is called statutory liquidity ratio (SLR).Commercial Banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold and unencumbered securities. Treasury bills, dated securities issued under market borrowing programme and market stabilisation schemes (MSS), etc also form part of the SLR. Banks have to report to the RBI every alternate Friday their SLR maintenance, and pay penalties for failing to maintain SLR as mandated.

How CRR and SLR impact on bank credits?

Leverage Ratio of assets to capital:

The term ‘Leverage’ denotes to the amount of debt a bank/ organization uses to finance assets and the ‘leverage ratio’ is the proportion of debts that a bank has compared to its equity/capital. There are different leverage ratios such as Debt to Equity, Debt to Capital and Debt to Assets.

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What is Leverage Ratio of assets to capital?

NSFR or Net Stable Funding Ratio:

NSFR or Net Stable Funding Ratio is a significant component on Liquidity Standards of the Basel III reforms. The guidelines in this regard finalized by RBI for implementation will come into effect in India from April 1, 2020.Unlike LCR guidelines which promote short term resilience of a bank’s liquidity profile, the NSFR guidelines ensure reduction in funding risk over a longer time horizon by requiring banks to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress.

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NSFR or Net Stable Funding Ratio

Liquidity coverage ratio (LCR):

The liquidity coverage ratio (LCR) refers to highly liquid assets held by financial institutions to meet short-term obligations.  LCR forms on traditional liquidity “coverage ratio” methodologies used internally by banks to assess exposure to contingent liquidity events. The LCR guidelines ensure reduction in funding risk over a 30 days horizon by requiring banks to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress. The standard requires that, absent a situation of financial stress, the value of the ratio should not be lower than 100%.

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Liquidity coverage ratio (LCR)

Coverage ratio or provisioning coverage ratio:

There are different types of coverage ratios which are calculated by different stake holders of a business.

In banking business, banks set aside prescribed percentage of funds for covering the prospective losses due to bad loans. This type of provisions made by the banks is known as ‘Provisioning Coverage Ratio (PCR)’.

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What is provisioning Coverage ratio?

Debt service coverage ratio (DSCR) and interest service coverage ratio:

When long term loan applications of the customers are appraised by a bank it would calculate debt service coverage ratio and interest service coverage ratio through the financial papers submitted by the borrower. The above ratios measure the company’s ability to service its debt and meet its financial obligations. The higher the coverage ratio, the easier it should be to make interest payments on its debt or pay dividends.

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“Debt service coverage ratio (DSCR) and interest service coverage ratio”

Slippage Ratio:

Fresh accretion of NPAs during the year or a falling below the current position of standard assets of the bank is a slippage. Let us take an example that the gross NPA of a bank last financial year is 12% and in the current financial year it is 15% due to fresh accumulation of bad loans. We call it as fresh slippage of 3% in the current year.

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what is Slippage Ratio?

CRAR (Capital to Risk Weighted Assets Ratio):

Capital to Risk (Weighted) Assets Ratio (CRAR) is also known as Capital adequacy Ratio, the ratio of a bank’s capital to its risk. The banking regulator tracks a bank’s CAR to ensure that the bank can absorb a reasonable amount of loss and complies with statutory Capital requirements. Higher CRAR indicates a bank is better capitalized.

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CRAR (Capital to Risk Weighted Assets Ratio)

Funding Volatility Ratio and Market Liability Ratio:

In banking parlance, volatile liabilities are ‘hot’ or ‘unstable’ funds that can disappear from bank’s balance sheet overnight. Demand deposits are best examples of volatile liabilities which can move out of the bank overnight.

Thus, funding volatility ratio (FVR) is calculated by proportion of liquid assets to CASA deposits i.e. FVR=Liquid assets÷ CASA deposits.

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 What are the funding volatility ratio and Market liability ratios?

Market debt ratio/Market Liability ratio:

Market debt ratio is a solvency ratio that measures the proportion of the book value of a company’s debt to sum of the book of value of its debt and the market value of its equity.

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 What are the funding volatility ratio and Market liability ratios?