Risk Management in Banking and Insurance · Liquidity Risk Management

Liquidity Management Tools and RBI Facilities for Banks

Q: What is the difference between CRR and SLR?

CRR is the share of NDTL kept as cash with RBI and earns no interest. SLR is the share of NDTL kept by the bank itself in liquid assets such as government securities, gold and cash. Both are percentages of NDTL.

Q: What is the difference between repo, reverse repo and MSF?

In a repo, the bank borrows from RBI against securities. In a reverse repo, the bank lends surplus funds to RBI. MSF is an overnight borrowing window priced above repo, meant for acute shortages.

Q: What is the Standing Deposit Facility?

It is a facility, introduced in April 2022, where banks can park surplus funds with RBI without giving collateral, at a rate below repo. It sets the floor of the policy corridor.

Q: How do banks manage intraday liquidity?

They forecast payment inflows and outflows across the day, hold ready collateral and liquid assets, and use intraday credit from RBI when needed. They also monitor peak usage and set limits.

Updated 11 October 2026 · Fact-checked

Banks manage liquidity with reserve rules (CRR in cash with RBI, SLR in liquid assets, both set as a percentage of NDTL) and RBI facilities (LAF repo, standing deposit facility, MSF). To solve questions, compute NDTL-based requirements, then pick the tool by purpose, timing and cost.

Understand Liquidity Management Tools and RBI Facilities

Liquidity risk is the risk that a bank cannot meet its payment obligations on time without heavy loss. Banks fund long-term loans with short-term deposits, so they must always hold cash or assets that can quickly become cash. Tools fall into two groups: mandatory reserves and RBI liquidity facilities.

CRR (Cash Reserve Ratio) is the share of a bank's Net Demand and Time Liabilities (NDTL) that it must keep as cash balance with RBI. It earns no interest and cannot be used for daily lending. RBI changes it to absorb or release liquidity across the whole system. SLR (Statutory Liquidity Ratio) is the share of NDTL that a bank must hold in liquid assets: cash, gold and unencumbered approved securities such as government securities. SLR is under the Banking Regulation Act, 1949, and it earns interest on the securities. Both are percentages of NDTL, but CRR sits with RBI as cash while SLR stays with the bank.

The Liquidity Adjustment Facility (LAF) handles day-to-day liquidity. In a repo, a bank sells government securities to RBI and agrees to buy them back, so it borrows money at the repo rate. A reverse repo works the other way: the bank lends surplus funds to RBI against securities. Since April 2022, the Standing Deposit Facility (SDF) lets banks park surplus funds with RBI without collateral at a rate below repo. The Marginal Standing Facility (MSF) is an overnight window for banks in acute shortage. It is priced above repo, and banks can use it against securities, including those within their SLR holding, up to a limit set by RBI.

Together these form the policy corridor: SDF rate at the floor, repo rate in the middle, MSF rate at the ceiling. The corridor keeps overnight money-market rates inside a band. RBI also uses variable rate repo and reverse repo auctions, open market operations and, in some periods, other measures to adjust liquidity for longer periods.

For intraday liquidity, a bank must have enough funds during the day to settle payments before incoming receipts arrive. It tracks timing of inflows and outflows, keeps collateral ready for intraday credit from RBI, and monitors peak usage. Structural liquidity (longer-term mismatches) is managed through gap limits, stable funding and contingency funding plans, covered in related topics.

Key rules to remember

CRR requirement: Required cash with RBI = CRR % × NDTL; Cash balance with RBI; earns no interest. The percentage is set by RBI and changes over time, so use the rate given in the question.
SLR requirement: Required liquid assets = SLR % × NDTL; Held by the bank in cash, gold or approved securities that are unencumbered. Securities pledged elsewhere may not count.
Policy corridor (typical structure): SDF rate = Repo rate − 0.25%; MSF rate = Repo rate + 0.25%; This is the framework since 2022. Use the spreads only if the question does not give the rates. MSF rate is the same as the Bank Rate.
Interest cost of overnight borrowing: Cost = Amount × Rate × Days ÷ 365; Use for comparing repo and MSF cost.
Excess or shortfall: Excess/shortfall = Actual held − Required; Compute separately for CRR and SLR.

How to solve Liquidity Management Tools and RBI Facilities questions

Use this method for numerical and descriptive questions on liquidity tools and RBI facilities.

1Identify what is asked: a requirement (CRR/SLR), a facility choice (repo, SDF, MSF), a cost, or an explanation of a policy move.
2Write down NDTL and each given ratio or rate. Note whether rates are stated or must be derived from the corridor.
3For CRR and SLR, multiply the percentage by NDTL. Compare with holdings and state excess or shortfall.
4For facilities, decide the direction: shortage means borrow (repo, then MSF if needed); surplus means lend or park (reverse repo or SDF).
5Compute the cost or return using Amount × Rate × Days ÷ 365, and compare options.
6Add the qualitative point: collateral needed, tenor (overnight or term), and who bears the cost (CRR earns nothing).
7State a clear conclusion or recommendation in one sentence.

Quickest way: Purpose-Collateral-Price scan

When to use it: Use in MCQs and short comparison questions where you must tell tools apart quickly.

Ask: is it a reserve rule (CRR, SLR) or a facility (repo, SDF, MSF)?
CRR means cash with RBI, no return. SLR means liquid assets with the bank, which earn a return.
For facilities, fix the corridor order: SDF lowest, repo middle, MSF highest.
Shortage means borrow (repo or MSF); surplus means park (reverse repo or SDF).
Check collateral: SDF needs none; repo and MSF need eligible securities.

Common mistakes in Liquidity Management Tools and RBI Facilities

Saying CRR is kept in government securities or that it earns interest.
CRR and SLR are both 'ratios' and get mixed up.
Fix: Remember: CRR = Cash with RBI, no interest. SLR = Securities and other liquid assets with the bank itself.
Calculating CRR or SLR on total deposits or total assets instead of NDTL.
Students use the figure that is easiest to see in the balance sheet.
Fix: Always base both on NDTL. Use the NDTL figure given in the question.
Confusing repo and reverse repo direction.
The names are written from RBI's side.
Fix: Repo: RBI lends to the bank, injecting liquidity. Reverse repo: the bank lends to RBI, absorbing liquidity. Ask who gets the cash.
Placing MSF below repo, or treating SDF as needing collateral.
Memorising rates without the corridor picture.
Fix: Draw the corridor: SDF (floor) < repo < MSF (ceiling). SDF is collateral-free; MSF is a penal-type overnight window.
Counting pledged securities toward SLR.
Ignoring the word 'unencumbered'.
Fix: Only securities free of any lien count. Deduct those pledged or used for borrowing, unless the question says otherwise.
Treating intraday liquidity as the same as overnight LAF borrowing.
Both involve RBI and collateral.
Fix: Intraday liquidity covers timing gaps within the payment day. Overnight facilities cover the end-of-day shortage.

Worked examples

Example 1

A bank has NDTL of ₹40,000 crore. Assume CRR is 4% and SLR is 18%. It holds ₹1,500 crore as cash with RBI and ₹7,500 crore in unencumbered approved securities and other eligible liquid assets. Find the excess or shortfall for each requirement.

Show the solution

CRR requirement = 4% × ₹40,000 crore = ₹1,600 crore.
Cash with RBI = ₹1,500 crore, so shortfall = ₹1,600 − ₹1,500 = ₹100 crore.
SLR requirement = 18% × ₹40,000 crore = ₹7,200 crore.
SLR holding = ₹7,500 crore, so excess = ₹7,500 − ₹7,200 = ₹300 crore.
The SLR excess cannot cover the CRR shortfall, because CRR must be met in cash with RBI.

Answer: CRR shortfall of ₹100 crore; SLR excess of ₹300 crore. The bank must raise ₹100 crore in cash, for example through repo under LAF.

Example 2

On a night, a bank has a shortfall of ₹500 crore. Assume repo rate is 6.50% and the corridor is ±0.25%. Compare the one-night cost of borrowing ₹500 crore through repo and through MSF, using a 365-day year, and recommend.

Show the solution

MSF rate = 6.50% + 0.25% = 6.75%.
Repo cost = 500 × 6.50% × 1 ÷ 365 = 32.5 ÷ 365 = ₹0.0890 crore, about ₹8.90 lakh.
MSF cost = 500 × 6.75% × 1 ÷ 365 = 33.75 ÷ 365 = ₹0.0925 crore, about ₹9.25 lakh.
Difference = about ₹0.34 lakh, or roughly ₹34,000 for one night.
Repo is cheaper, but it depends on RBI's repo window and eligible collateral. MSF is the backstop if repo funds are insufficient or unavailable.

Answer: Repo costs about ₹8.90 lakh and MSF about ₹9.25 lakh for the night. Use repo first and keep MSF as the last-resort overnight source.

Exam tips

Expect MCQs that test one fact: where CRR is held, what is excluded from SLR, or the order of the policy corridor. Learn the one-line definitions cold.
In numerical questions, show NDTL × percentage clearly. Marks are given for the method even if one figure is off.
When asked to compare tools, use a short structure: purpose, collateral, rate, tenor. Four crisp lines beat a long paragraph.
In case scenarios, link the tool to the bank's problem: a day-end shortage points to repo or MSF; surplus points to SDF; a system-wide drain points to CRR cut or OMO.
Do not quote current rates from memory. Use the rates in the question and state any assumption you make.

Practice questions from Liquidity Risk Management

Liquidity Management Tools and RBI Facilities: frequently asked questions

What is the difference between CRR and SLR?

CRR is the share of NDTL kept as cash with RBI and earns no interest. SLR is the share of NDTL kept by the bank itself in liquid assets such as government securities, gold and cash. Both are percentages of NDTL.

What is the difference between repo, reverse repo and MSF?

In a repo, the bank borrows from RBI against securities. In a reverse repo, the bank lends surplus funds to RBI. MSF is an overnight borrowing window priced above repo, meant for acute shortages.

What is the Standing Deposit Facility?

It is a facility, introduced in April 2022, where banks can park surplus funds with RBI without giving collateral, at a rate below repo. It sets the floor of the policy corridor.

How do banks manage intraday liquidity?

They forecast payment inflows and outflows across the day, hold ready collateral and liquid assets, and use intraday credit from RBI when needed. They also monitor peak usage and set limits.