Rbi Mulls Graded Reserve Ratios For Fis

The issue of statutory requirements on the liabilities of financial institutions is being hotly debated, with various factors like the quantum of the ratios and the reporting systems being looked into by the Reserve Bank of India (RBI). The option of introducing varying reserve requirements for different maturities is also being examined.

To create a level playing field for banks and FIs, the RBI is in favour of initially imposing a cash reserve ratio (CRR) of 10 per cent and a statutory liquidity ratio (SLR) of 25 per cent on the short-term liabilities of financial institutions. The FIs want lower ratios. Says an FI official: A CRR of three per cent and SLR of 25 per cent as in the case of inter-bank deposits should be applicable to us.

 

The central bank might consider imposing reserve ratios on all the liabilities of financial institutions. The issue of reserve requirements has come into sharp focus with the RBI increasing the borrowing limits of financial institutions on Saturday. The limit has now been capped at the level of the net owned funds of individual institutions.

A chief executive of a leading commercial bank said: The Reserve Bank will look at imposing CRR and SLR on all the liabilities of financial institutions eventually. However, there must be a difference. The short term liabilities should attract higher reserve ratios and the long term liabilities should attract lower deposits.

The rationale for reserve requirement is to protect the interest of the depositors. Since the short-term liabilities are more volatile, the reserves should be higher to cushion the volatility. And by extension, the relatively stable long-term liabilities require a lower reserve ratio.

The market wisdom on balance maturity is that as long-term liabilities get closer to redemption, the reserve ratio should increase and be bought on par with the ratios imposed on short term liabilities. Such a principle is followed in the case of long-term bonds used for tier-II capital. These bonds are subject to progressive discounting for the purpose of calculating capital adequacy as they near maturity.

Says an RBI official: