REDUCTION OF SLR AND CRR

The Narasimham Committee had argued for reductions in SLR on the grounds that the
stated government objective of reducing the fiscal deficits will obviate the need for a
large portion of the current SLR.
Similarly, the need for the use of CRR to control secondary expansion of credit would be
lesser in a regime of smaller fiscal deficits.
However bankers strongly felt that CRR and SLR along with high non-performing assets
(on which banks do not earn any return) which were 10 per cent CRR and 25 percent
SLR in the past were affecting banks' bottom lines.
The committee offered the route of Open Market Operations (OMO) to the Reserve Bank
of India for further monetary control beyond that provided by the (lowered) SLR and
CRR reserves.
The monetary policy perspective essentially looks at SLR and CRR requirements (especially
CRR) in the light of several other roles they play in the economy. The CRR is considered an
effective instrument for monetary regulation and inflation control. The SLR is used to impose
financial discipline on the banks, provide protection to deposit-holders, allocate bank credit
between the government and the private sectors, and also help in monetary regulation. However
bankers strongly feel that these along with high non-performing assets (on which banks do not
earn any return) 10 per cent CRR and 25 per cent SLR (most banks have SLR investments way
above the stipulation) are affecting banks' bottom lines. With an effective return of a mere 2.8 per
cent, CRR is a major drag on banks' profitability. The Narasimham Committee had argued for

reductions in SLR on the grounds that the stated government objective of reducing the fiscal
deficits will obviate the need for a large portion of the current SLR. Similarly, the need for the
use of CRR to control secondary expansion of credit would be lesser in a regime of smaller fiscal
deficits. The committee offered the route of Open Market Operations (OMO) to the Reserve
Bank of India for further monetary control beyond that provided by the (lowered) SLR and CRR
reserves. Ultimately, the rule was Reduction in the reserve requirements of banks, with the
Statutory Liquidity Ratio (SLR) being brought down to 25 per cent by 1996-97 in a period of 5
years. The recent trend in several developed countries (US, Switzerland, Australia, Canada, and
Germany) towards drastic lowering of reserve requirements is often used to support the argument
for reduced reserve levels in India.
The arguments for higher or lower SLR and CRR ratios stem from two different perspectives one
which favours the banks, and the other which favours the bank reserves as a monetary policy
instrument. The bank perspective seeks to maximise "lendable" resources, the banks' control over
resource deployment, and returns to the banks from the "preempted" funds. It is also claimed that
the low returns from the forced investments in government securities adversely affect the bank
profitability - the cost of deposits for banks, which averages at 15 16 per cent, was much greater
than the (earlier) returns on the government securities. This argument is sometimes carried
further to state that RBI makes profits on impounded money, at the cost of bank profitability. To
some extent, this argument has been weakened by the increase in interest on government
securities to 13.5 per cent.

MINIMUM CAPITAL ADEQUACY RATIO

The growing concern of commercial banks regarding international competitiveness and
capital ratios led to the Basle Capital Accord 1988. The accord sets down the agreement
to apply common minimum capital standards to their banking industries, to be achieved
by year-end 1992.
Based on the Basle norms, the RBI also issued similar capital adequacy norms for the
Indian banks.

 CAR is the ratio that measures a banks capacity to meet time liabilities and risks like
operational risks, credit risks and other risks. This is done because the depositors are
secured about their deposits and banks have a cushion for their potential losses.
It is the measure of a banks financial strength expressed by the ratio of its capital (net
worth and subordinated debt) to its risk-weighted credit exposure (loans). It is also called
CRAR-Capital to Risk-weighted Assets Ratio.
The Reserve Bank of India (RBI), currently prescribes a minimum capital of 9% of riskweighted assets, which is higher than the internationally prescribed percentage of 8%.
The rates for New Private Sector Banks are 10 % ;Banks undertaking Insurance business
10 % ;Local Area Banks 15%
Most banks in India have a capital adequacy of more than 12 %. A bank with a higher
capital adequacy is considered safer because if its loans go bad, it can make up for it from
its net worth.