A STUDY MOVEMENT OF CRR & SLR BY RBI: VAIBHAV SRIVASTAVA
Introduction
The Reserve Bank of India employs various instruments of monetary policy[1] in India to achieve the objectives of price stability and higher economic growth. Some of the important instrument or tools of monetary policy in India are:
● Open Market Operations(OMO)
● Cash Reserve Ratio(CRR)
● Statutory Liquidity Ratio(SLR)
● Liquidity Adjustment Facility(LAF)
● Selective Credit Control
The Monetary Policy Committee (MPC)[2] was constituted by the central government in September 2016 for maintaining price stability, while keeping in mind the objective of growth.
What is NDTL?
The Net Demand and Time Liabilities or NDTL[3] shows the difference between the sum of demand and time liabilities (deposits) of a bank (with the public or the other bank) and the deposits in the form of assets held by the other bank.
The net demand and time liabilities
of a bank can be calculated by using the following formula:
Bank’s
NDTL = Demand and time liabilities (deposits) – deposits with other banks
Demand Liabilities[4]: The demand liabilities include all those liabilities of a bank which are payable on demand. Such as current deposits, cash certificates and cumulative/recurring deposits, outstanding telegraphic transfers, Demand drafts, margins against the letter of credit/guarantees, credit balance in a cash credit account, etc., all are paid on demand.
Time Liabilities[5]: Time liabilities are those liabilities of a bank which are payable otherwise on demand. These include fixed deposits, cash certificates, staff security deposits, time liabilities portion of saving deposits account, margin held against the letter of credit (if not payable on demand), gold deposits, etc.
Net
Demand and Time Liability is used by banks for computation of Cash Reserve
Ratio (CRR), Statutory Liquidity Ratio (SLR) and Liquidity Adjustment Facility
(LAF).
What is CRR?
CRR is the amount of funds that a Commercial Bank has to keep with RBI. CRR is defined under Section 42(1) of RBI act 1934[6]. It is calculated on the basis of NDTL. It is maintained in Cash form & is calculated on a daily basis. No interest is paid by RBI on CRR amount. There is no minimum or maximum limit.
Thus NDTL = Liabilities to others + Net Inter Bank Liabilities (NIBL), where NIBL = Liabilities to Banking system - Assets with Banking system.
The Reserve Bank of India (Amendment) Act, 1956, is empowered to impose statutorily 'Cash Reserve Ratio' (CRR) on banks anywhere between 3% to 15% of the net demand and time liabilities (NDTL) as of the last Friday of the second proceeding week changed to fortnight from March 29, 1985.
The CRR is a two-part requirement: One is certain percentage of Net Demand and Time Liabilities (NDTL) and other is 10% of the increase in these liabilities known as Incremental Cash Reserve Ratio (ICRR) after November 11, 1984. On the additional required reserves over the minimum CRR of 3%, the RBI pays interest to banks at a specified rate.
CRR is the minimum reserve deposits which banks have to compulsorily keep with the RBI. These are calculated as a specific percentage to Reservable Liabilities arrived at on the basis of Net Demand and Time Liabilities (NDTL). NDTL constitutes liabilities of banks, which it owes to the banking system and others.
CRR rate[7] is prescribed from time to time by the RBI. At present it is at 3% (as on March, 2020)
The three keynote for CRR is:
● Has to be maintained by the Bank with RBI in the form of Cash.
● No interest is given by RBI.
● Banks are profitable & promoted when CRR is less.
What is SLR?
SLR is an amount that a Commercial bank has to keep with itself. SLR is defined under Section 24 of Banking Regulation Act, 1949[8]. It is also calculated on the basis of NDTL.It can be maintained in Cash, Gold, Government Securities & is calculated on a daily basis. It has no minimum limit but has a maximum limit of 40%.
SLR, statutory liquidity ratio is the amount of money that is invested in certain specified securities predominantly central government & state government securities. In SLR, the money goes into investment predominantly in the central government securities which means the banks earn some amount of interest on that investment as against CRR where it earns zero. A reduction in the SLR levels would have more funds with the banks which would allocate them to promote agriculture, industry and trade.
There was a reduction of SLR from 38.5% to 25% because of the suggestion by Narasimham Committee.
Combination of SLR & CRR[9]
The combination of CRR & SLR, is the amount of money which remains blocked for statutory reasons and is not available for investment in various other high earning avenues like loans are securities markets or other bonds. That means it puts a certain amount of pressure on the bank's balance sheets. However, at the same time that money remains safe and with that mechanism RBI also offers safely to the depositors who have invested money in the banks.
Conclusion
According to various scholars, if on lowering of reserve
requirements (SLR and CRR) thus
releasing more lendable resources which the bank can deploy profitably, may
cause reduction in preemptions.[10]
The (CRR) is a heavy tax on the banking system and balance with the reserve
bank which earns no interest and represents an indirect tax on the bank
depositors. Phased reduction in the CRR and its eventual withdrawal need to be
high on agenda in the coming years. This would ensure more level playing field
between bank and non-bank institutions and would enable banks to offer better rates
to depositors.
[1] rbi.org.in
[3] Section 42(2) of the Reserve Bank of India Act, 1934
[4] Section 42 (1C) of the RBI Act, 1934
[5] Clause (d) of the Explanation to Section 42(1) of the RBI Act, 1934.
[6] The Reserve Bank of India Act, 1934
[8] Banking Regulation (Amendment) Act, 2007 replacing the Regulation (Amendment) Ordinance, 2007
[10] K.K. Sharma (1968): Indian Monetary Policy, Meenakshi Prakashan, Meerut, India
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