The Implications of Pre-emptions of Crr and Slr on Banking Operations

Historically, the bank funds in India have been forestalled through three channels — the cash reserve ratio (CRR), statutory liquidity ratio (SLR) and directing credit to preferred sectors based on mornms formulated by priority sector. This article deals with the implications of pre-emptions of first two on banking operations.

The CRR is a manadatory requirement for banks to maintain certain portion of their deposits with Reserve Bank of India (RBI) in the form of cash reserves to meet their payments obligations. Originally, The Reserve Bank of India (RBI) Act stipulated that a Bank must maintain a CRR of minimum 3 percent of its net demand and time liabilities. However, in 2006, this restriction was lifted by an amendment in the act. While the RBI freely prescribes this rate, CRRs above 3 per cent can be still viewed as a monetary tool to limit money expansion by influencing the money multiplier. But the Banks’ approach towards CRR made it serve a much wider purpose. Amid the 1990s, when there was inflow of outside assets through deposits from non-resident Indian (NRI), a differential CRR was recommended on such deposits to confine their inflows.

This role, CRR being utilized as an instrument for regulation of NRI deposit streams, got relegated to the background once the relative attraction of such deposits vis-a-vis rupee deposits was slashed. Presently that the intrigue rates on NRI stores have been liberated, the above job of CRR could well be resuscitated again.

In the later period after 2004, when there was a gigantic convergence of remote capital through varied types of obligation and non-obligation streams, and the RBI wound up accumulating large forex saves, the CRR became an optional instrument to clean the rupee assets released from such dollar purchases. This was particularly enabled by not paying any enthusiasm on CRR balances maintained by banks with the RBI. Alternate choices of sterilisation through open market operations and the repo operations through the liquidity adjustment window (LAF) cost the central bank, just as the market stabilisation conspire cost the Government fiscally as far as intrigue payments.

The official view on CRR has been changing. Amid the time of financial suppression before 1990s, CRR was the most favored monetary arrangement instrument. However, the Narasimham Committee of 1991 prescribed gradual decrease in CRR and increased utilization of roundabout market-based instruments. This was broadly accepted and the CRR decreased from more than 15 for each penny to 4. 5 for every penny by 2003. Be that as it may, since 2004, the utilization of CRR as an instrument of sterilisation and also a monetary device has gained ground again. At the same time, the ratio stands now at 4. 5 for every penny, the past noteworthy low. Under these circumstances, the official reasoning on CRR in the present crossroads isn't known. Since CRR acts as a tax that increases their transaction costs, banks, in general, would want its job to be reestablished to being a prudential least prerequisite of not more than 3 for every penny. And since quantitative easing has progressed toward becoming a fashion of central banking across the world, the RBI may well cut the CRR additionally down gradually to about 3 for every penny amid the current easing phase, without dismissing monetary control in the face of inflation remaining unyieldingly high at around 8 for every penny.

Like CRR, SLR can also be seen as a half and half instrument of a distinctive variety. The SLR, according to a few, isn't a monetary device and is just a prudential prerequisite to serve as a pad for the safety of bank stores. The base solution in this manner was 25 for each penny of bank's demand and time liabilities. Be that as it may, it was also more a way of discovering a captive market for government securities, particularly when they were bearing underneath market intrigue rates. As anyone might expect, this ratio contacted about 38 for every penny around 1991.