Title - The study of changes in CRR
and SLR during the decade 2002 to 2012
Table of Contents
Introduction
Background
Cash
Reserve Ration(CRR) and Statutory Liquidity Ratio (SLR) are two important
reserve ratios applicable to banks. These are also tools that the Reserve Bank
of India uses in the conduct of its monetary policy. The purpose of this thesis
is to analyze the changes in these
reserve ratios through the last decade. The content of this thesis is based on
RBI’s Master Circular on the subject and my own practical knowledge gained
through the management course.
Definition
CRR - The
Cash Reserve Ratio
CRR is
that proportion of a bank’s Net Demand and Time Liabilities (NDTL) that it has
to keep as cash deposits with RBI. Cash deposits do not mean physical cash, but
a credit balance in a current account that every bank maintains at RBI.
This
proportion is specified by RBI and could change from time to time. Currently
(on the date this piece is being published), CRR is 4.75%.CRR is governed by
the provisions of Section 42 of the Reserve Bank of India Act, 1934. There is
no minimum level of CRR. We could go upto zero CRR (negative values are of
course absurd). Similarly, there is no maximum. In theory, CRR can go upto
100%, which would mean RBI impounding the entire NDTL as a cash reserve. Until
the RBI Act was amended in 2007, the minimum value of CRR was statutorily fixed
at 3% and the maximum was fixed at 20%. Both these limits (lower and upper)
were removed by the amendment which came into effect in early 2007.
SLR - Statutory Liquidity Ratio
SLR
is that proportion of a bank’s Net Demand and Time Liabilities (NDTL)
that it has to maintain as investments in certain specified assets. SLR is
governed by the provisions of Section 24 of the Banking Regulation Act. There
is no minimum stipulation on SLR (earlier there used to be a minimum stipulated
SLR of 25% - but this was removed with an amendment to the Banking Regulation
Act in 2007). However, SLR can not exceed 40%.
Statutory
liquidity ratio is the amount of liquid assets such as precious metals(Gold) or
other approved securities, that a financial institution must maintain as
reserves other than the cash . The statutory liquidity ratio is a term most
commonly used in India.
Changes in SLR and CRR
Indian
banks’ holdings of government securities (Government securities) are now close
to the statutory minimum that banks are required to hold to comply with
existing regulation. When measured in rupees, such holdings decreased for the
first time in a little less than 40 years (since the nationalisation of banks
in 1969) in 2005–06. While the
recent credit boom is a key driver of the decline in banks’ portfolios of
G-Sec, other factors have played an important role recently.
These
include:
Ø Interest rate increases.
Ø Changes in the prudential regulation
of banks’ investments in G-Sec.
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