Rbi Empowered For Selective Crr, Slr Cuts

The Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949 empower the central bank to bring down the level of cash reserve ratio (CRR) as well as the statutory liquidity requirements (SLR) even below the permissible limit without amending the respective Acts.

Going by the RBI Act, banks are required to maintain a minimum 3 per cent of their total demand and time liabilities as CRR.

At present, the CRR is pegged at 7.5 per cent. The minimum SLR requirement is 25 per cent of banks' assets. The RBI can allow banks to have even less than 3 per cent CRR at its discretion. In case of SLR, however, the central government can bring down the level at the recommendation of the RBI.

Says Section 42 (7) of the RBI Act, 1934: "The bank may, for such period and subject to such conditions as may be specified, grant to any schedule bank such exemptions from the provisions of this section as it thinks fit with reference to all or any of its offices or with reference to the whole or any part of its assets and liabilities."

This is significant in the context of financial institutions planning to convert themsleves into banks. The RBI can use its discretion to bring down their CRR requirement even below the floor level (3 per cent) permissible by the Act without amending it. It has however, already moved the government seeking to amend the Act.

As far as the SLR requirement is concerned, Section 53 of the Banking Regulation Act, 1949, says: "The central government may, on the recommendation of the Reserve Bank, declare, by the notification in the official gazette, that any or all of the provisions of this Act shall not apply to any banking company (or institution) or to any class of banking companies either generally or for such period as may be specified."

The RBI, however, can waive any of the provisions of this Act on the State Bank of India (Section 51 of the Act) in which it holds the majority stake.

Financial insitutions have been pitching for lower CRR and SLR as they are not in a position to raise huge liabilities to meet the normal reserve ratio obligations on thier way to become banks. They also argue that since they do not have demand deposits, they should not be subjected to 7.5 per cent CRR on the line of commercial banks. As far as SLR is concerned, they argue that it would be difficult for them to buy so much of government bonds from the secondary market to fulfil the 25 per cent obligation since the market does not have the depth. ICICI and Industrial Development Bank of India together would need to buy out over Rs 30,000 crore worth of government bonds to meet the 25 per cent SLR commitment when they become banks.