Summary of article on how Banking Sector works

Here is the link to the article https://www.cnbctv18.com/views/how-the-banking-system-works-and-money-is-created-an-explainer-5143971.htm

Banks have to maintain two types of reserve namely CRR and SLR. If the balance is excess than required then it is banking liquidity surplus.

If CRR’s amount is lower than what is required then SLR can be used to fulfil the required amount. Banks can do so by RBI’s LAF window. They pay LAF policy repo rate for this transformation.

In the same way, if SLR’s amount is lower than what is required then CRR can be used to fulfil the required amounts. For this banks have to pay LAF policy reverse repo rate.

Every time a fresh loan is given by bank it creates a fresh bank liability.

The constraint in bank capital is that with the increase in loan book size the requirement of capital also increases.

Liquidity in banks can be alter by RBI only through Open Market Operations (OMOs), Foreign Currency intervention,  government spending, currency in circulation, by setting minimum requirements of CRR and SLR.

Individual banks can only alter their own liquidity. If they have surplus than they will lend money and can buy risk-free securities, both of which will lead to decrease in short term rates. Through this banks are encouraging lending.

If they have deficit then they will accept deposits and will sell risk-free securities, both of which will lead in increase in short term rates. Through this banks are discouraging lending.