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Business Environment

Notes

Notes CRR for Co-op Banks Raised by 50 BPs

After raising the cash reserve ratio (CRR) of commercial banks, the Reserve Bank of India
(RBI) has increased the CRR for scheduled primary (urban) co-operative banks (UCBs) by
half a percentage point to 5%.
The increase in the CRR will have no immediate impact on lending rates in the medium-
term, said cooperative bankers, as there is ample liquidity in the banking system and
credit demand has not picked up.
The rise in the CRR will be implemented in two stages, the first 25 basis point rise on
September 18 to 4.75 percent, and the second on October 2 to 5%.
Punjab & Maharashtra Co-operative Bank Ltd. Managing Director Joy Thomas said that
the increase in CRR is a move to curb the rising inflation rate in economy since the
banking system is flush with funds. The increase is unlikely to have any impact on the
lending rates in the medium rates, said Thomas.

Source: Business Standard, September 15, 2004
The Narsimhan Committee that submitted its report in November 1991 recommended
that high CRR adversely affected bank profitability. Because of this, they charge higher
interest rates, eventually reducing the level of investment and increasing the cost of
production. The government decided to reduce the CRR in a phased manner. Initially it
was reduced by .5% to 14.5% and by April 22, 2000 it was reduced to 8%. As a result,
lending rate of banks was reduced to 12% from 17% of 1991.
Figure 5.2: Statutory Liquidity Ratio

Reduction

CRR Low Interest Rate Higher Investment

5. Statutory Liquidity Ratio: Under the Section 24 of the Banking Regulation Act, 1949,
commercial banks have to maintain liquid assets in the form of cash, gold and unencumbered
approved securities equal to not less than 25% of their total demand and time deposits
liabilities. This is known as statutory liquidity reserve requirements.
There are three objectives of the SLR:
(a) to restrict expansion of bank credit
(b) to augment banks' investment in government securities

(c) to ensure solvency of banks

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