Download - CRR and SLR in banks
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-