CASH RESERVE RATIO(CRR)ANDSTATUTORY LIQUIDITY RATIO(SLR)

Submitted by (Group #14)Bikash Rathi 11020241076Gautam Shankar 11020241079Vivek Chaudhary 11020241136

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 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 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

5-Jul-35 14-Dec-7427-Nov-81 4-Feb-84 2-Jul-88 11-Jun-94 9-Nov-96 29-Aug-9824-Feb-01 2-Oct-04 10-Nov-0725-Oct-080

2

4

6

8

10

12

14

16Rate

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 depositsthe central bank had stopped paying interest

to banks on CRR in 2007 SBI chairman Pratip Chaudhuri for

abolition of cash reserve ratiocosting 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

5-Feb

-70

24-Apr-

70

28-Aug-

70

4-Aug

-72

17-Nov-

72

8-Dec-

73

1-Jul-

74

1-Dec-

78

25-Se

p-81

30-Oct-

81

28-Jul-

84

1-Sep-

84

8-Jun-

85

6-Jul-

85

25-Apr-

87

2-Jan-

88

22-Se

p-90

29-Feb

-92

9-Jan-

93

6-Feb

-93

6-Mar-

93

21-Aug-

93

18-Se

p-93

16-Oct-

93

20-Aug-

94

17-Se

p-94

29-Oct-

94

25-Oct-

97

8-Nov-

08

7-Nov-

09

18-Dec.

-2010

11th A

ugust

, 201

20

5

10

15

20

25

30

35

40

45Rate

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.

THANK YOU….!!

REFRENCE http://www.rbi.org.in/scripts/

BS_ViewMasCirculardetails.aspx?id=7340 http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?

prid=26097 http://economictimes.indiatimes.com/news/news-by-

industry/banking/finance/banking/finance-ministry-wants-rbi-to-pay-7-interest-on-crr-deposits/articleshow/15467462.cms

http://articles.economictimes.indiatimes.com/2012-09-04/news/33582161_1_cash-reserve-ratio-liquidity-management-assocham

http://articles.economictimes.indiatimes.com/2012-08-23/news/33342479_1_pratip-chaudhuri-cash-reserve-ratio-state-bank

http://in.reuters.com/article/2012/08/31/india-crr-idINDEE87U01S20120831

http://www.peerpower.com/et/debate/85/Should-the-RBI-decrease-SLR-