Integrated Reserve and Short-Term Funding Cases - Article

Introduction

A bank treasury cannot manage funding independently of regulatory reserves.

Every day, treasury must consider questions such as:

• How much liquidity is actually available?

• Has NDTL increased?

• Is sufficient CRR maintained?

• Is the SLR position comfortable?

• Is the shortage overnight or longer?

• Are eligible securities available as collateral?

• Should the bank borrow unsecured or through repo?

• Is surplus liquidity better deployed in the market or with RBI?

• Is MSF required as a backstop?

The current IIBF CAIIB BFM syllabus places Reserve Assets: CRR and SLR, Liquidity Adjustment Facility, and Payment and Settlement Systems together under Module C – Funding and Regulatory Aspects.

This reflects how treasury actually operates: reserve compliance, liquidity management, and funding decisions must be considered together.

RBI's current published rates show:

These are regulatory rates and may change; for an examination question referring to another date, use the rate applicable to that date or specifically supplied in the question.

Learning Objectives

After studying this topic, you should be able to:

• connect changes in NDTL with CRR and SLR requirements;

• distinguish reserve compliance from available liquidity;

• select Call, Notice, or Term Money according to tenor;

• choose between unsecured borrowing and repo/TREPS;

• understand the role of SDF in surplus liquidity;

• recognise MSF as an overnight backstop;

• identify how collateral use can affect the reserve position; and

• solve integrated CAIIB case studies using a consistent decision framework.

The Integrated Treasury Decision

A useful sequence is:

Reserve Position → Liquidity Gap → Tenor → Collateral → Funding Source → Cost → Regulatory Check

Reserve Position

Check:

• applicable NDTL;

• CRR requirement;

• actual RBI cash balance;

• SLR requirement; and

• eligible SLR assets.

Liquidity Gap

Determine whether treasury has:

• surplus liquidity; or

• deficit liquidity.

Tenor

Is the requirement:

• overnight;

• up to 14 days;

• above 14 days; or

• temporary but collateralised?

Collateral

Are eligible securities available?

This may make repo/TREPS relevant.

Funding Source

Possible sources include:

• Call Money;

• Notice Money;

• Term Money;

• market repo/TREPS;

• RBI liquidity facilities; or

• MSF as an overnight backstop.

Regulatory Check

The cheapest transaction is not necessarily the correct transaction if it:

• creates reserve shortfall;

• breaches a limit;

• mismatches tenor; or

• uses an ineligible product.

Case 1: Deposit Surge Increases Treasury Cash

A bank receives a major increase in deposits.

The treasury dealer argues:

“We have received a large cash inflow, so the entire amount is now available for lending or investment.”

Analysis

The conclusion is incomplete.

If the additional liabilities increase the bank's applicable NDTL, they can also increase:

• required CRR; and

• required SLR.

At current rates, CRR is 3% and SLR is 18%, subject to the detailed regulatory computation.

Therefore, treasury must first reassess the regulatory reserve requirement before treating the full deposit inflow as freely deployable liquidity.

CAIIB Learning

Deposit growth can create liquidity and reserve requirements simultaneously.

Do not confuse:

cash received

with

cash freely available after regulatory requirements.

Case 2: CRR Shortfall but Large Government-Security Portfolio

A bank discovers that its eligible cash balance with RBI is insufficient for the applicable CRR requirement.

The bank holds Government securities well above the minimum SLR requirement.

A dealer says:

“There is no problem because our G-Sec portfolio is more than sufficient.”

Analysis

That reasoning is wrong.

CRR and SLR are different requirements.

CRR requires the prescribed cash balance with RBI.

Holding additional Government securities does not automatically substitute for a CRR cash deficiency.

The bank must therefore manage its RBI cash position separately from its securities portfolio.

CAIIB Learning

Remember:

CRR → RBI cash

SLR → eligible statutory liquid assets

An SLR surplus does not automatically cure a CRR shortfall.

Case 3: SLR Position Falls after Sale of Government Securities

Treasury expects payment outflows during the day.

To raise cash, it sells a large quantity of Government securities.

After the sale, cash liquidity improves significantly.

Analysis

The cash problem may have improved, but treasury must now recheck its SLR position.

If the securities sold were part of the assets being relied upon for SLR compliance, reducing those holdings could narrow or eliminate the bank's SLR buffer.

Thus:

better immediate cash liquidity can create a weaker statutory-liquidity position.

Better Approach

Before a large outright sale, treasury should examine:

• available SLR surplus;

• other eligible liquid assets;

• expected NDTL;

• collateral requirements; and

• whether temporary funding through repo would better suit the liquidity need.

CAIIB Learning

Never examine an outright security sale only from the cash perspective.

Case 4: Overnight Unsecured Funding Need

A bank faces an overnight funding deficit.

No collateral is proposed.

Analysis

The direct money-market concept is Call Money.

RBI defines Call Money as unsecured borrowing or lending on an overnight basis.

Therefore:

Overnight + Unsecured → Call Money

However, if suitable collateral is available, treasury may also compare secured alternatives such as repo/TREPS.

CAIIB Learning

Tenor alone does not always produce the final treasury decision.

Ask:

secured or unsecured?

Case 5: Ten-Day Known Liquidity Deficit

Treasury knows that a cash deficit will continue for ten days.

A dealer proposes borrowing overnight Call Money every day because the current overnight rate appears attractive.

Analysis

The requirement is not genuinely overnight.

RBI defines Notice Money as unsecured funds for periods above overnight and up to and including 14 days.

A ten-day requirement therefore fits the Notice Money tenor.

Repeated overnight borrowing may expose the bank to:

• rollover risk;

• interest-rate uncertainty; and

• daily market availability risk.

CAIIB Learning

A lower overnight rate on day one does not necessarily mean that repeated Call borrowing is the safest or cheapest strategy over ten days.

Match funding tenor to known liquidity tenor.

Case 6: Twenty-Day Unsecured Requirement

A bank requires unsecured funds for 20 days.

A manager classifies the borrowing as Notice Money.

Analysis

Incorrect.

Under RBI's current operative definitions:

• Call Money = overnight;

• Notice Money = above overnight up to 14 days;

• Term Money = above 14 days up to one year.

Therefore, a 20-day unsecured borrowing falls under:

Term Money

CAIIB Learning

Remember:

1 day → Call

2–14 days → Notice

Above 14 days up to 1 year → Term

Case 7: Temporary Cash Need with Government Securities Available

A bank requires funds for a short period.

It has eligible Government securities available.

The dealer proposes selling the securities outright and buying them back later.

Analysis

An outright sale creates market-price and reinvestment risk because the bank must later re-enter the market.

If the liquidity requirement is temporary, a repo/TREPS transaction may better match the economic need.

Repo allows the bank to obtain funds against securities with an agreed reversal.

RBI defines repo as borrowing funds by selling securities with an agreement to repurchase them on an agreed future date at a price incorporating repo interest.

Important Reserve Treatment

For Government-security market repos, RBI's framework provides that funds borrowed under repo, including tri-party repo in eligible Government securities, are exempt from CRR/SLR computation, while eligible securities acquired under reverse repo can qualify for SLR according to the applicable framework.

CAIIB Learning

For a temporary funding need:

Collateral available → consider secured funding before selling the investment outright.

Case 8: Repo or Call Money?

A bank needs overnight funds and has eligible Government securities.

Both Call Money and repo are available.

Which is correct?

Analysis

Both can potentially solve the overnight liquidity problem, but they are structurally different.

The bank should compare:

• market rate;

• collateral availability;

• counterparty limits;

• settlement;

• liquidity value of securities; and

• internal funding policy.

CAIIB Learning

A case may have more than one feasible product.

The best choice depends on the complete fact pattern.

Case 9: Overnight Surplus Liquidity

A bank finishes the day with substantial surplus funds and wants a standing RBI facility for overnight placement.

Analysis

The relevant facility is the Standing Deposit Facility (SDF).

SDF:

• absorbs liquidity;

• is available to eligible LAF participants;

• is an overnight standing facility under the current framework; and

• does not require RBI to provide collateral.

RBI introduced SDF as the floor of the LAF corridor. It is currently 25 basis points below the policy repo rate.

At the current published rates:

SDF = 5.00%

Policy Repo = 5.25%.

Reserve Treatment

RBI specifies that SDF deposits:

• do not qualify for CRR maintenance; but

• are eligible assets for SLR purposes.

CAIIB Learning

Do not classify SDF balances as CRR simply because they are deposits with RBI.

Case 10: Bank Uses SDF despite CRR Deficiency

A bank has surplus funds available late in the day and places them under SDF.

Later, it argues that this SDF placement should also cure its CRR shortage.

Analysis

Incorrect.

RBI's SDF framework explicitly states that SDF deposits:

shall not be reckoned as balances eligible for CRR maintenance.

Therefore, the bank must separately ensure that its required CRR cash balance is maintained.

CAIIB Learning

SDF with RBI ≠ CRR balance

This is a high-value examination distinction.

Case 11: Unexpected Overnight Funding Stress

A bank experiences an unexpected liquidity shortage near the end of the day.

Normal market funding is unavailable or insufficient.

The bank has eligible securities and qualifies for RBI's standing liquidity facility.

Analysis

The relevant backstop is the Marginal Standing Facility (MSF).

MSF allows eligible banks to borrow overnight from RBI against eligible securities.

It forms the ceiling of the current LAF corridor.

At the current published rates:

MSF = 5.50%

compared with:

Policy Repo = 5.25%.

The liquidity-management framework allows banks to access MSF using excess SLR and the prescribed ability to dip into SLR, historically specified up to 2% of NDTL under the operative framework.

CAIIB Learning

Unexpected overnight shortage + RBI backstop → MSF

MSF should not be confused with ordinary market borrowing.

Case 12: Treasury Uses MSF as Routine Cheap Funding

A treasury department plans to fund predictable everyday liquidity requirements through MSF on a regular basis.

Analysis

This misunderstands the role of the facility.

MSF is positioned above the policy repo rate and acts as the upper-bound standing backstop of the liquidity corridor.

It is not intended to replace normal treasury funding through:

• deposits;

• money markets;

• repo/TREPS; or

• other routine funding channels.

CAIIB Learning

Availability does not mean economic suitability.

A backstop facility should not automatically become the first-choice funding source.

Case 13: Market Repo vs RBI Repo

A CAIIB case states:

“Bank A borrows overnight from Bank B against Government securities.”

A student identifies this as an RBI policy repo transaction.

Analysis

Incorrect.

RBI distinguishes:

• LAF repo – repo undertaken with RBI; and

• market repo – repo between market participants.

In this case, both counterparties are banks.

Therefore, it is:

Market Repo

not an RBI liquidity-operation repo.

CAIIB Learning

Always identify the counterparty.

Bank ↔ RBI → RBI liquidity framework

Bank ↔ Market participant → Market repo

Case 14: Liquidity Surplus but SLR Position Is Tight

A bank has excess overnight cash but only a narrow buffer over its minimum SLR requirement.

Treasury considers several deployment options.

Analysis

The decision should account for both:

• return; and

• reserve-asset treatment.

An SDF placement can absorb overnight surplus and, under RBI's framework, remains eligible for SLR treatment even though it does not qualify for CRR.

The treasury should still evaluate:

• rate;

• accessibility;

• alternative market return;

• next-day liquidity requirement; and

• internal policy.

CAIIB Learning

Funding and investment decisions can affect regulatory ratios differently.

Case 15: CRR Reduction Is Announced

RBI reduces CRR.

A manager says:

“Every rupee released from CRR can now immediately be converted into fresh loans.”

Analysis

A CRR reduction releases liquidity from the statutory cash requirement.

But the bank must still consider:

• SLR requirements;

• liquidity risk;

• credit demand;

• capital adequacy;

• internal risk limits; and

• other regulatory constraints.

Therefore:

CRR release = additional liquidity

but not necessarily:

automatic equal increase in lending

CAIIB Learning

Monetary liquidity and lending capacity are related, but they are not identical.

Case 16: Large SLR Buffer but No Immediate Cash

A bank has a large portfolio of eligible Government securities and is fully compliant with SLR.

However, it faces a major payment obligation today and does not hold enough immediately available cash.

Analysis

This illustrates the difference between:

liquid assets

and

cash immediately available for settlement.

The bank may need to monetise the securities through:

• repo/TREPS;

• sale;

• an eligible RBI liquidity facility; or

• another short-term funding source.

CAIIB Learning

SLR compliance does not mean that every payment obligation is already funded in cash.

Treasury must manage both the stock of liquid assets and the timing of cash flows.

Integrated Product-Selection Table

This table is a starting point, not a substitute for analysing:

• pricing;

• collateral;

• limits;

• maturity;

• settlement; and

• regulatory treatment.

A Five-Step CAIIB Case Method

For any integrated funding case, use R-G-T-C-A.

R – Reserve Position

Check:

• CRR;

• SLR; and

• NDTL.

G – Gap

Is treasury:

• short of funds; or

• surplus?

T – Tenor

Determine exact duration.

C – Collateral

Are eligible securities available?

A – Access

Which market or RBI facility can actually be accessed under the applicable rules?

Only after these steps should you compare rates.

Reserve Assets and Funding Assets Should Not Be Double-Counted Blindly

Treasury must understand the regulatory treatment of each transaction.

For example:

• securities used in secured funding may affect their availability or regulatory treatment;

• securities acquired under eligible reverse repo can receive prescribed SLR treatment;

• SDF deposits qualify for SLR but not CRR;

• MSF permits specified use of SLR securities; and

• Government-security repo borrowing receives specific CRR/SLR treatment.

Therefore, a case should never be solved merely by looking at the balance-sheet amount of securities.

The transaction structure matters.

Cost vs Liquidity Certainty

Suppose:

• Call Money is cheaper today;

• a bank needs funds for ten days; and

• the Notice Money rate is slightly higher.

Choosing daily Call borrowing solely because today's rate is lower ignores the possibility that:

• tomorrow's rate may rise;

• liquidity may disappear; or

• limits may tighten.

This is rollover risk.

Treasury must compare:

quoted cost today

with

certainty of funding over the required period.

Collateral Has an Opportunity Cost

Secured borrowing may appear cheaper because the lender has collateral.

But treasury should also ask:

• Is the collateral required for SLR buffer?

• Could it be needed for another repo?

• Is it already encumbered?

• Could it support emergency liquidity?

• Does using it restrict future flexibility?

Therefore:

cheapest secured funding is not always costless from a liquidity-management perspective.

CAIIB Exam Focus

CRR and SLR must be checked before assessing freely deployable liquidity.

Current CRR = 3.00%.

Current SLR = 18.00%.

CRR and SLR are not interchangeable reserves.

SLR compliance does not guarantee immediate cash liquidity.

Call Money = unsecured overnight funds.

Notice Money = unsecured above overnight to 14 days.

Term Money = unsecured above 14 days to one year.

Repo/TREPS is relevant when temporary liquidity is required against eligible collateral.

Government-security repo has specific CRR/SLR treatment under RBI's framework.

SDF absorbs liquidity.

SDF is the floor of the current policy corridor.

SDF balances qualify for SLR but not CRR.

MSF injects overnight backstop liquidity.

MSF is the ceiling of the corridor.

Policy repo lies between SDF and MSF.

Market repo and RBI repo are different because the counterparties and policy purpose differ.

Funding tenor should match the expected duration of the liquidity gap.

Repeated overnight borrowing creates rollover risk.

Common Exam Traps

Trap 1: High SLR Surplus Automatically Covers CRR Shortfall

Incorrect.

CRR has its own cash-maintenance requirement.

Trap 2: CRR Compliance Means the Bank Has No Liquidity Risk

Incorrect.

A bank can satisfy CRR and still face payment outflows exceeding immediately available cash.

Trap 3: SLR Compliance Means No Funding Is Required

Incorrect.

SLR assets may need to be monetised before they can meet immediate cash obligations.

Trap 4: Every Overnight Deficit Should Be Funded through Call Money

Incorrect.

If collateral is available, repo/TREPS may also be relevant.

Trap 5: A Ten-Day Unsecured Borrowing Is Call Money

Incorrect.

It is Notice Money.

Trap 6: A Twenty-Day Unsecured Borrowing Is Notice Money

Incorrect.

It is Term Money.

Trap 7: SDF Placement Can Be Counted as CRR

Incorrect.

RBI states that SDF deposits are not eligible for CRR.

Trap 8: SDF Is a Liquidity-Injection Facility

Incorrect.

It absorbs surplus liquidity.

Trap 9: MSF Is Used to Deposit Surplus Money with RBI

Incorrect.

MSF is an overnight borrowing facility.

Trap 10: Market Repo Is the Same as Policy Repo

Incorrect.

Market repo is between market participants. Policy/LAF repo involves RBI.

Trap 11: Selling SLR Securities Can Never Affect Compliance

Incorrect.

A sale can reduce the available SLR buffer.

Trap 12: Lowest Funding Rate Always Means Best Funding Choice

Incorrect.

Treasury must also consider:

• tenor;

• collateral;

• rollover risk;

• regulatory impact; and

• liquidity certainty.

Trap 13: CRR Reduction Means All Released Funds Must Become Loans

Incorrect.

The liquidity may be used in several ways and remains subject to other prudential requirements.

Trap 14: Collateral Has No Value Once SLR Requirement Is Met

Incorrect.

Collateral provides liquidity optionality and may support future secured funding or RBI facilities.

Memory Technique

Remember R-G-T-C-A:

• R – Reserve position

• G – Funding gap

• T – Tenor

• C – Collateral

• A – Access to funding

For unsecured tenor:

Call → 1 day

Notice → 2–14 days

Term → Above 14 days

For RBI standing facilities:

SDF → Surplus Deposited → Floor

MSF → Money Shortage → Ceiling

And remember the central integrated rule:

First protect reserve compliance. Then fund the cash-flow gap with the product that best matches tenor, collateral, risk and cost.