CASH RESERVE RATIO(CRR) Scheduled commercial Banks(SCBs) in India are required to hold a certain proportion of their Demand & Time Liabilities(DTL) with RBI as per Section 42 (1) of the Reserve Bank of India Act, 1934 This minimum ratio is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio. Is a tool used by RBI to control liquidity in the banking system.
DEMAND LIABILITIESDemand Liabilities include all liabilities which are payableon demand: current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees, balances in overdue fixed deposits, cash certificates and cumulative/recurring deposits, outstanding Telegraphic Transfers (TTs), Mail Transfer (MTs), Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand.
TIME LIABILITIESTime Liabilities are those which are payableotherwise than on demand: Fixed Deposits, Cash Certificates, Cumulative And Recurring Deposits, Time Liabilities Portion Of Savings Bank Deposits, Staff Security Deposits, Margin Held Against Letters Of Credit, Gold Deposits.
LIABILITIES NOT TO BE INCLUDED FOR DTLCOMPUTATION Paid up capital, reserves, any credit balance in the Profit & Loss Account of the bank, amount of any loan taken from the RBI and the amount of refinance taken from Exim Bank, NHB, NABARD, SIDBI; Net income tax provision; Amount received from DICGC towards claims and held by banks pending adjustments thereof; ECGC by invoking the guarantee; insurance company on ad-hoc settlement of claims pending judgment of the Court Net unrealized gain/loss arising from derivatives transaction under trading portfolio; Income flows received in advance such as annual fees and other charges which are not refundable. Bill rediscounted by a bank with eligible financial institutions as approved by RBI
EXEMPTED CATEGORIESSCBs are exempted from maintaining CRR on the following liabilities: Demand and Time Liabilities in respect of their Offshore Banking Units (OBU);and Inter-bank term deposits/term borrowing liabilities of original maturities of 15 days and above and up to one year in "Liabilities to the Banking System” Similarly banks should exclude their inter-bank assets of term deposits and term lending of original maturity of 15 days and above and up to one year in "Assets with the Banking System" Interest accrued on these deposits is also exempted from reserve requirements.
PROCEDURE FOR COMPUTATION OF CRR In order to improve cash management by banks, as a measure of simplification, a lag of one fortnight in the maintenance of stipulated CRR by banks has been introduced with effect from the fortnight beginning November 06, 1999.
POWERFUL MONETARY TOOLRBI uses CRR to: Drain excess liquidity or Release funds needed for the growth of the economy from time to time. Higher the ratio (i.e. CRR), the lower is the amount that banks will be able to use for lending and investment.This power of RBI to reduce the lendable amount byincreasing the CRR, makes it an instrument in thehands of a central bank through which it can controlthe amount that banks lend.Thus, it is a tool used by RBI to control liquidity in thebanking system.
INTEREST RATES, INFLATION & CRR Demand customers for goods borrow less and to maintain and services profit eventually thus comes margin spend less down Banks banks have less increase money lending Increase in for rates CRR lending Thus, Increase in CRR increases interest rates and pulls down inflation to some extent
LATEST NEWS ON CRR Finance ministry wants RBI to pay 7% interest on CRR deposits the central bank had stopped paying interest to banks on CRR in 2007 SBIchairman Pratip Chaudhuri for abolition of cash reserve ratio costing the banking system about Rs 21,000 crore. Why is CRR not applied to insurance and other companies who are mobilising deposits from the public? Assocham for continuation of cash reserve ratio
GLOBAL SCENARIO In the US, the reserve requirement is in respect of transaction (current) accounts & is at about 10% There is no reserve requirement for time deposits. In the UK, it is voluntary. Even so, banks do keep reserves to have enough liquidity to prevent any sudden increase in cash outflow which can result in a run on the bank. On average it is about 3% In the euro zone, the reserve requirements are at 1% Generally, central banks in the U.S. and EU do not change the reserve requirements liquidity is regulated through open market operations.
STATUTORY LIQUIDITY RATIO(SLR) Every Scheduled commercial bank(SCB) in India is required to maintain a minimum proportion of their Net Demand and Time Liabilities as liquid assets in: cash, or in gold valued at a price not exceeding the current market price, or in unencumbered investment in the following instruments: Treasury Bills of the Government of India; State Development Loans (SDLs); any other instrument as may be notified by the Reserve Bank of India Maximum limit of SLR is 40%
STATUTORY LIQUIDITY RATIO(SLR) Procedure for Computation of Statutory Liquidity Ratio (SLR) broadly similar to the procedure followed for CRR purpose. include inter-bank term deposits / term borrowing liabilities of all maturities in Liabilities to the Banking System. include their inter-bank assets of term deposits and term lending of all maturities in Assets with the Banking System for computation of NDTL for SLR purpose. Penalties If a banking company fails to maintain the required amount of SLR, liable to pay to RBI the penal interest for that day @3 %pa above the Bank Rate on the shortfall and if the default continues on the next succeeding working day, the penal interest may be increased to 5%pa above the Bank Rate for the concerned days of default on the shortfall.
SLR OVER THE YEARS Rate454035302520 Rate1510 5 0 Current rate:23% wef 11-08-12, decreased from 24%, injected around Rs.60,000 cr.of primary liquidity into the banking system.
SHOULD THE RBI DECREASE SLR?For Against• Will Improve Credit Flow To Private Cos • Will Adversely Impact Fiscal Deficit• Focus Should Be To Boost Participation Of The • Indian Banks Have Been Able To Withstand ThePrivate Sector By Providing Ready Access To Global Storm Due To These Prudent Polices OfDebt Finance Instead Of Redistributing Liquidity The Reserve Bank Of IndiaArtificially In Favour Of The Government Sector• Solvency Measures Prevalent In Most Other • Risk Mitigation ToolEmerging Markets Continue To Be Lower ThanThat In India.• Compliance With SLR Targets Compels Banks • Banks Accept Public Deposits And Are In A WayTo Invest In Government Bonds, Rather Than Repositories Of Public Trust, And The ConfidenceAllowing Demand And Prices Of Such Securities Reposed By Investors In Institutions Is VeryTo Be Determined By Market Forces. Important From The Financial Markets Perspective• Higher SLR Increases Market Risk For Banks • In The Current Context, Worldwide Banks AreDue To The Sheer Size Of Holdings Of Price- Being Criticised For Having Risky Assetsensitive Securities Portfolios, There Is A Perceptible Shift Among Banks’ Asset Portfolios From Credit And Other Derivative Instruments To Holdings Of Sovereign Government Bonds.