Crr, Slr Scrapped On Inter-Bank Deposits

At the same time, the banks are now exempted from maintenance of statutory liquidity ratio (SLR) on liabilities to banking system.

This decision which will come into effect from the fortnight beginning April 26, 1997 should release Rs 950 crore on the CRR front and Rs 2,375 crore due to the SLR relaxation. Since banks holds excess

SLR, the cut in it will not release fresh funds unless the securities are sold. Banks might, however, stop buying fresh securities as their deposits increase as they already have excess SLR.

Money market dealers expect that the quantum of inter-bank liabilities will shoot up.

 

They predict that the foreign banks and the new private banks will now fulfill their CRR requirement by borrowing from the call money market.

Not surprisingly, almost all the foreign bankers have welcomed this decision of the apex bank.

In fact, one banker jokingly remarked that the 'foreign lobby' had ultimately won. Till date, all scheduled commercial banks excluding regional rural banks (RRBs) were required to maintain a CRR of 10 per cent on liabilities to banking system computed as provided in Clause (d) of Explanation to Section 42(1) of the Reserve Bank of India Act, 1934. With the scrapping on the reserve requirements on inter-bank liabilities, two things are expected to happen.

First, the phenomenon of call rates ruling at less than 0.50 per cent on reporting Friday will be history.

The rates will be uniform during the course of the entire fortnight. Second, if a bank wishes to borrow then there will a reduction in the net cost of funds.

The RBI has indicated that the decision to scrap the reserve ratios on inter-bank liabilities was taken with a view to facilitating the development of a more realistic rupee yield curve and term money market.

However, money market dealers point out that exemption of inter bank borrowings from CRR and SLR stipulations is not a sufficient condition for the development of an inter bank term money market. While a hindrance has been done away with, other necessary conditions for the development of a inter-bank term money market are differences in expectations and the willingness of treasury managers in public sector banks to take a view on interest rates. This is, however, sadly absent in the Indian context.

In fact, after the announcement of the policy, there were some enquiries for borrowing six-month money at 9 per cent and one-year money at 10 per cent.