NIMISHA JAIN MENTOR: SRIKANTH RAO

What is crr?
CRR is Cash Reserve Ratio. It refers to keeping a portion of net demand and time liabilities (NDTL) of banks with the central banks (In India its Reserve Bank of India, RBI). Central bank fixes this percentage of

NDTL.
Central bank can change this percentage as a monetary measure to control the availability of funds in the economy i.e. to inject liquidity or to suck liquidity. RBI doesnt pay any interest on such

funds held with it.

All liabilities which are payable on demand; they include 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 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 are those which are payable otherwise than on demand; they include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, deposits held as securities for advances which are not payable on demand and Gold Deposits.

As per the SBI chairman.

State Bank of India Chairman Pratip Chaudhuri made a strong pitch for the abolition of cash reserve ratio, saying that keeping required funds with the Reserve Bank without any interest was costing the banking system about Rs 21,000 crore. "CRR does not help anybody and it is unfairly put on the banks. Why is CRR not applied to insurance and other companies who are mobilising deposits from the public?" he asked. CRR, he said, should be phased out within a reasonable time-frame. "Phasing out of CRR would release scarce capital resources which will help the banks in reducing rates for the industry. Chaudhuri said the other option was to increase the SLR, on lines of CRR percentage. Banks earn interest on SLR deposits.

As per ICICI chairman.

ICICI Bank Chairman K V Kamath disagrees with the suggestion of SBI chief Pratip Chaudhuri that RBI should scrap CRR, saying it is part of the monetary policy and no issue can be made of it. "I think the monetary authority (RBI) in its wisdom uses all these tools as appropriate and that's what is being done. This (CRR) is nothing new. India always had a CRR for as long as I can remember and I don't think honestly (there is) an issue to be made here", he told reporters

"You should look at it (CRR) as part of monetary policy that it is exercised and part of it is liquidity policy for the banks", added Kamath, also non-executive Chairman of Infosys Ltd.

Why CRR should be abolished??

The CRR mechanism had lost its relevance as a monetary tool in post reforms and post-technology (or core banking solutions) banking. With latest management information system tools, the RBI is able to get the requisite banking figures more accurately at weekly intervals. Data integrity is almost 100 per cent, unlike in the earlier era.

For stability and soundness of the banking system, the RBI insists on capital
adequacy ratio in tune with latest Basel norms To assess the strength of each bank in all parameters, CAMELS (C Capital adequacy, A Asset quality, M Management quality, E Earnings, L Liquidity, S Sensitivity to Market Risk) is monitored by the RBI through its annual Therefore, continuance of CRR, more so without any interest payout, has lost all purpose.

Global scenario..
Cash reserves are no longer mandatory in many advanced countries. Australia, New Zealand, Canada, Sweden, have done away with it. The UK has a system of voluntary CRR.

In the US, CRR is calculated only on transaction accounts (checking accounts).

The Euro Zone has a low CRR of 1 per cent. At the other end, Pakistan, Bangladesh, Sri Lanka, Zambia and Mexico stipulate higher rates of CRR than ours. All BRIC countries still hold on to CRR and make periodical alterations to affect the liquidity. Except in countries with underdeveloped banking systems, the purpose of CRR is

not safety, but liquidity.

The emphasis has moved to capital adequacy ratios from CRR in many countries, as far as safety is concerned.

Indian scenario
In India, banking is not what it was in 1934 or 1949. With the nationalisation of the major commercial banks in 1969 and 1980, the ownership and risk profile of banks in the country have undergone a sea change. A major share of banking business in the country is handled by banks where the majority shareholder, if not the sole shareholder, is the government. Further, capital adequacy and income recognition norms are well established as per international

standards.
The reference rates and open market operations are available with the regulator as tools to control money supply.

Have we not reached a stage where we can review CRR??

THANK YOU

SLR..
SLR (Statutory Liquidity Ratio) is a portion of banks Net Demand and Time
liabilities (NDTL) that Scheduled Commercial Banks are required to maintain with themselves in form of Cash, Gold, Government Bonds or unencumbered approved securities at closing of any business day. It regulates credit growth in country. RBI can increase it up to 40% of NDTL .this monetary tool is used by the RBI to ensure sufficient liquidity with banks. an increase in SLR will restricts banks lending capacity.

Difference between SLR and CRR

SLR restricts the banks leverage of pumping money into the economy. CRR, or Cash Reserve Ratio, is the portion of deposits that the banks have to maintain with the RBI. The other difference is that for SLR, banks can use cash, gold or unencumbered approved securities whereas with CRR it has to be only cash. CRR is maintained in cash form with RBI, whereas SLR is maintained in liquid

form with banks themselves.

DIFFERENTIAL CRR Phasing out the CRR should be a distinct, even if distant goal. But what can be examined at this juncture is whether the CRR prescription is to be applied to all banks uniformly, irrespective of ownership. The RBI can think of classifying banks into specific categories for CRR, say, banks with 100 per cent Government ownership, banks with more than 51 per cent government ownership, private sector banks and foreign banks and stipulating different rates for different categories, with the necessary amendments to the RBI Act. The CRR may be fixed at a lower level for the first two categories, in view of the higher safety level these banks offer to the depositors. Higher levels of CRR can be fixed for the new entrants in the private sector, compared with the existing ones, for a specific period. A differential rate of CRR will provide a better level playing ground for the public sector banks that are expected to play a more active role in social banking. It may be noted that the private sector banks are outperforming public sector banks in profitability.

Definition of 'Open Market Operations - OMO' The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite What are the Open Market Operations (OMOs)? OMOs are the market operations conducted by the Reserve Bank of India by way of sale/ purchase of Government securities to/ from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis. When the RBI feels there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity conditions are tight, the RBI will buy securities from the market, thereby releasing liquidity into the market.