Crr and slr

CASH RESERVE RATIO(CRR)
AND
STATUTORY LIQUIDITY RATIO(SLR)
By
Shyamendra Verma
IMR Ghaziabad

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 LIABILITIES
Demand Liabilities include all liabilities which are payable
on 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 LIABILITIES
Time Liabilities are those which are payable
otherwise 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 DTL
COMPUTATION
 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 CATEGORIES
SCBs 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 TOOL
RBI 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 by
increasing the CRR, makes it an instrument in the
hands of a central bank through which it can control
the amount that banks lend.
Thus, it is a tool used by RBI to control liquidity in the
banking system.

CRR OVER THE YEARS
0
2
4
6
8
10
12
14
16
5-Jul-35
6-May-60
16-Sep-62
8-Sep-73
1-Jul-74
28-Dec-74
13-Nov-76
1-Jul-78
31-Jul-81
27-Nov-81
29-Jan-82
11-Jun-82
29-Jul-83
12-Nov-83
27-Oct-84
26-Oct-85
28-Feb-87
24-Oct-87
2-Jul-88
1-Jul-89
11-Jan-92
8-Oct-92
15-May-93
9-Jul-94
11-Nov-95
27-Apr-96
6-Jul-96
9-Nov-96
18-Jan-97
22-Nov-97
17-Jan-98
11-Apr-98
13-Mar-99
6-Nov-99
8-Apr-00
29-Jul-00
24-Feb-01
19-May-01
29-Dec-01
16-Nov-02
18-Sep-04
22-Jun-06
6-Jan-07
3-Mar-07
28-Apr-07
10-Nov-07
10-May-08
5-Jul-08
30-Aug-08
11-Oct-08
8-Nov-08
13-Feb-10
24-Apr-10
9-Mar-12
Rate
Rate
Current Status:4.75% (wef 10th March 2012)
decreased from 5.5%, injected around Rs.48,000 cr.of primary liquidity into
the banking system.

INTEREST RATES, INFLATION & CRR
Increase in
CRR
Banks
have less
money
for
lending
to maintain
profit
margin
banks
increase
lending
rates
customers
borrow less
and
eventually
spend less
Demand
for goods
and
services
thus comes
down
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
 SBI chairman 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.

 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%

 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
0
5
10
15
20
25
30
35
40
45
Rate
Rate
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
Private Sector By Providing Ready Access To
Debt Finance Instead Of Redistributing Liquidity
Artificially In Favour Of The Government Sector
• Indian Banks Have Been Able To Withstand The
Global Storm Due To These Prudent Polices Of
The Reserve Bank Of India
• Solvency Measures Prevalent In Most Other
Emerging Markets Continue To Be Lower Than
That In India.
• Risk Mitigation Tool
• Compliance With SLR Targets Compels Banks
To Invest In Government Bonds, Rather Than
Allowing Demand And Prices Of Such Securities
To Be Determined By Market Forces.
• Banks Accept Public Deposits And Are In A Way
Repositories Of Public Trust, And The Confidence
Reposed By Investors In Institutions Is Very
Important From The Financial Markets
Perspective
• Higher SLR Increases Market Risk For Banks
Due To The Sheer Size Of Holdings Of Price-
sensitive Securities
• In The Current Context, Worldwide Banks Are
Being Criticised For Having Risky Asset
Portfolios, There Is A Perceptible Shift Among
Banks’ Asset Portfolios From Credit And Other
Derivative Instruments To Holdings Of Sovereign
Government Bonds.

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