Friday, March 09, 2012

RBI once again reduces CRR

Another suicidal attempt is undertaken by Government of India and RBI to provide shield to corrupt bankers who damaged intrinsic value of banks during last two decades of reformation

In the name of adventure in credit growth banks had followed the path of misadventure both in credit growth and in branch expansion and consequences are now surfacing. It is true that such relaxation will for the time being provide ventilator to sick economy of the country and critical position of banks. Private banks will at least gain by this liberal attitude of the government. But it is not permanent solution to cure the ailing economy.

Government reduced SLR to 24% and has now CRR to 4.75% to increase profitability of banks who have lost their interest income in bad assets accumulated and concealed in the system.

RBI is releasing cash called as liquidity which was hitherto kept with RBI as safety valve. SLR has been decreased from 40% to 24% during last few years to ensure credit growth and CRR has been reduced to 4.75% to increase liquidity in the banking system and in turn increase credit growth. Still there is no hope of improvement. Let us see what happens in future. Bitter truth is that this sudden reduction in CRR will help crisis ridden banks to pay their  advance tax in time .

It is true that banks will be in a position to sanction more and more loans but as long as repayment of loan is not ensured, problem of liquidity crisis will undoubtedly recur again and again and assume critical proportion in near future. As a matter of fact it is unregulated credit growth undertaken by inefficient and ill motivated bankers which has resulted in increase in bad assets and erosion in profitability.

Government use SLR and CRR to contain inflation and to restrict money supply. It is unfortunate that instead of striking at the root of crisis in banks, RBI is willingly or unwillingly adding fuel to fire. How much relief will RBI provide by these temporary measures, God only knows but it is certain that consequence of bad policies and inefficient management of SLR and CRR will have to be borne by none other than investors and depositors?

Chandra Sekhar during his period of Prime Minister in India sold gold to control the economy, present government is providing stimulus package by way of reduction in SLR and CRR or by resorting to sell of government assets in the name of disinvestment. Undoubtedly such stimulus packages will help rich to grow richer and force poor to become poorer. Rich people  will get loan at lower rates and poor will be thrown in the hands of Micro finance Institute who are another form of moneylenders and extortionist as well as exploiters for poor villagers.

Time will say whether the remedy provided will add to the agony of economy or provide relief to sick economy.

 I however feel it is investors and depositors who will ultimately suffer the loss. I apprehend poor will have to bear the burden of increase in taxes and curtailment in subsidies and there is very less probability of poor getting any benefit through reduction in SLR or CRR or through disinvestment of public sector undertakings.

Let us wait forthcoming budget and credit policy of RBI likely to be announced in next week of March this year. AT least stock market will celebrate this sudden announcement and sudden relaxation in CRR by RBI without waiting for even forthcoming proposed credit policy announcement.

However taking a positive approach we should expect better days for public sector banks, depositors and investors.Let up pray God to help poor who will have to bear the increased burden of price rise due to excessive release of money in market .

dubti naiya ko bachane ke liye sara dam laga rahi hai sarkar. Ya ye kah sakte hai, Gau Markar Juta Dan kar rahi hai ye sarkar.

Statutory liquidity ratio is the amount of liquid assets such as precious metals or other approved securities, that a financial institution must maintain as reserves other than the cash --The Indian Central Bank???? Please be clear-->. The statutory liquidity ratio is a term most commonly used in India.

The objectives of SLR are to restrict the expansion of bank credit.

1.            To augment the investment of the banks in government securities.
2.            To ensure solvency of banks. A reduction of SLR rates looks eminent to support the credit growth in India.

The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing it respectively. This counter acts by decreasing or increasing the money supply in the system respectively. Indian banks’ holdings of government securities (Government securities) are now close to the statutory minimum that banks are required to hold to comply with existing regulation. When measured in rupees, such holdings decreased for the first time in a little less than 40 years (since the nationalisation of banks in 1969) in 2005–06.
While the recent credit boom is a key driver of the decline in banks’ portfolios of G-Sec, other factors have played an important role recently.
These include:
1.            Interest rate increases.
2.            Changes in the prudential regulation of banks’ investments in G-Sec.
Most G-Sec held by banks are long-term fixed-rate bonds, which are sensitive to changes in interest rates. Increasing interest rates have eroded banks’ income from trading in G-Sec.
Recently a huge demand in G-Sec was seen by almost all the banks when RBI released around 108000 crore rupees in the financial system. This was by reducing CRR, SLR & Repo rates. This was to increase lending by the banks to the corporates and resolve liquidity crisis. Providing economy with the much needed fuel of liquidity to maintain the pace of growth rate. However the exercise became futile with banks being over cautious of lending in highly shaky market conditions. Banks invested almost 70% of this money to rather safe Govt securities than lending it to corporates.
The quantum is specified as some percentage of the total demand and time liabilities ( i.e. the liabilities of the bank which are payable on demand anytime, and those liabilities which are accruing in one months time due to maturity) of a bank.
SLR rate = total demand/time liabilities × 100%
This percentage is fixed by the central bank. The maximum and minimum limits for the SLR are 40% and 25% respectively in India.[1] Following the amendment of the Banking regulation Act(1949) in January 2007, the floor rate of 25% for SLR was removed. Presently, the SLR is 24%.
Difference between SLR and CRR
Both CRR and SLR are instruments in the hands of RBI to regulate money supply in the hands of banks that they can pump in economy
SLR restricts the bank’s leverage in pumping more money into the economy. On the other hand, CRR, or cash reserve ratio, is the portion of deposits that the banks have to maintain with the Central Bank to reduce liquidity in economy. Thus CRR controls liquidity in economy while SLR regulates credit growth in the country
The other difference is that to meet SLR, banks can use cash, gold or approved securities whereas with CRR it has to be only cash. CRR is maintained in cash form with central bank, whereas SLR is money deposited in govt. securities.
The reserve requirement (or cash reserve ratio) is a central bank regulation that sets the minimum reserves each commercial bank must hold (rather than lend out) of customer depositsand notes. It is normally in the form of cash stored physically in a bank vault (vault cash) or deposits made with a central bank.
The reserve ratio is sometimes used as a tool in the monetary policy, influencing the country's borrowing and interest rates by changing the amount of loans available[1]. Western central banks rarely alter the reserve requirements because it would cause immediate liquidity problems for banks with low excess reserves; they generally prefer to use open market operations (buying and selling government-issued bonds) to implement their monetary policy. The People's Bank of Chinauses changes in reserve requirements as an inflation-fighting tool,[2] and raised the reserve requirement ten times in 2007 and eleven times since the beginning of 2010. As of 2006 the required reserve ratio in the United States was 10% on transaction deposits and zero on time deposits and all other deposits.
An institution that holds reserves in excess of the required amount is said to hold excess reserves.

1 comment:

Danendra said...

Published in Hindustan Times on 13/14 March 2012

What has the RBI done?
In a surprise move, the Reserve Bank of India (RBI) slashed the cash reserve ratio (CRR) by 0.75 percentage points to 4.75%. What is CRR?
CRR is the proportion of deposits banks have to park with the RBI.
Why has the RBI slashed the CRR?
The CRR cut will inject an estimated Rs 48,000 crore in the pool of banks' lendable resources. It is aimed at making more funds available with banks to match the rising demand from corporations to pay their advance taxes by March 15.
Will the reduction in CRR reduce borrowing rates for customers?
Maybe in a very indirect way. With more cash in hand following the cut in CRR, banks may not need to woo customers by offering higher interest rates to shore up their deposit base. Some banks may even consider lowering the interest they pay to customers on their fixed and savings deposits to cut costs. Lower costs, in turn, could prompt them to reduce their final lending rates.
What is the RBI expected to announce in its mid-quarter review on Thursday?
Analysts do not expect the RBI to reduce the repo rate on Thursday.
What is repo rate?
It is the rate at which the RBI lends to banks. A higher repo pushes up banks' borrowing costs prompting them to increase interest rates for final home, auto and corporate borrowers. It currently stands at 8.5%.
What is reverse repo rate?
It is the rate at which RBI absorbs cash from the system. At higher reverse repo, the central bank would suck cash from the system to stymie demand and cool prices. It currently stands at7.5%.
What is liquidity corridor?
The difference between the repo and reverse repo rates is the liquidity corridor or the liquidity adjustment facility (LAF).
What are policy rates?
The policy rate acts the guide for final lending rates that banks charge from borrowers.
In tight liquidity situations the repo rate acts as the policy rate. In situations of excess liquidity, when banks park money with the RBI from their pool of lendable resources, the reverse repo rate acts the policy rate.
What role do policy rates play in price control?
Till October, the RBI had raised the repo rate 13 times in 19 months to tame prices.
A higher repo would raise banks' borrowing costs, which in turn would raise interest rate on final home, auto and corporate loans.
How does a higher reverse repo rate help in reducing prices?
A higher reverse repo would give banks incentive to park money with RBI, reducing liquidity and demand. A higher reverse repo means it would suck cash from the system to stymie demand and cool prices.
When will the RBI start slashing interest rates?
With inflation showing signs of moderating analysts expect the RBI to start reducing interest rates in annual monetary policy in April.
So, can consumers expect their EMIs to come down?
Not immediately. A lower repo will bring down costs for banks, but banks usually offer lower interest rates only for new customers. Existing home loan borrowers who have borrowed money on floating rates will have to wait longer before banks actually bring down their EMIs.
What about loans on automobiles and consumer goods?
Automobile and consumer goods loans are all on fixed interest rates and, therefore, existing customers are not affected by changes in RBI's policy rates.