RBI refuses exceptions on CRR, SLR; gives some leeway on PSL, investments for merger: HDFC Bank

  • April 24, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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RBI refuses exceptions on CRR, SLR; gives some leeway on PSL, investments for merger: HDFC Bank

Subject: Economy

Section Monetary Policy

Context:

  • HDFC Bank said the Reserve Bank has refused to make any exceptions on cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements as sought by it ahead of the merger of mortgage financier parent HDFC with itself. The central bank has, however, allowed some leeways on the priority sector lending front, the city-headquartered bank said in a letter to the exchanges.
  • HDFC Bank and HDFC announced a USD 40 billion merger, the largest in Indian corporate history, last April and are awaiting the final regulatory go-ahead for the same. In pursuit of the same scheme, HDFC Bank sought relaxations on certain regulatory requirements from the regulator.The bank informed the exchanges that it has received a letter from RBI with views on certain matters, while clarity on other requests is expected in due course.

CRR

  • It is a certain minimum amount of deposit that the commercial banks have to hold as reserves with the central bank.
  • The percentage of cash required to be kept in reserves, vis-a-vis a bank’s total deposits, is called the Cash Reserve Ratio.
  • The cash reserve is either stored in the bank’s vault or is sent to the RBI. Banks do not get any interest on the money that is with the RBI under the CRR requirements.

Primary purposes of the Cash Reserve Ratio

  • Since a part of the bank’s deposits is with the Reserve Bank of India, it ensures the security of the amount. It makes it readily available when customers want their deposits back.
  • Also, CRR helps in keeping inflation under control.
  • At the time of high inflation in the economy, RBI increases the CRR, so that banks need to keep more money in reserves so that they have less money to lend further.

Basel-III created two liquidity ratios: LCR and NSFR.

  • The liquidity coverage ratio (LCR) will require banks to hold a buffer of high-quality liquid assets sufficient to deal with the cash outflows encountered in an acute short term stress scenario as specified by supervisors. The goal is to ensure that banks have enough liquidity for a 30-days stress scenario if it were to happen.
  • The Net Stable Funds Rate (NSFR) requires banks to maintain a stable funding profile in relation to their off-balance-sheet assets and activities. NSFR requires banks to fund their activities with stable sources of finance (reliable over the one-year horizon). The minimum NSFR requirement is 100%.

Statutory Liquidity Ratio:

  • Statutory Liquidity Ratio popularly called SLR is the minimum percentage of deposits that the commercial bank maintains through gold, cash and other securities.
  • These deposits are maintained by the banks themselves and not with the RBI or Reserve Bank of India unlike the Cash Reserve Ratio.
    • Banks earn returns on money parked as SLR
  • Section 24 and Section 56 of the Banking Regulation Act 1949 mandates all scheduled commercial banks, local area banks, Primary (Urban) co-operative banks (UCBs), state co-operative banks and central co-operative banks in India to maintain the SLR.
  • It comprises of– cash, gold and SLR securities, comprising central and state government securities:
    • Dated securities
    • Treasury Bills of the Government of India;
    • Dated securities of the Government of India issued from time to time under the market borrowing programme and the Market Stabilization Scheme;
    • State Development Loans (SDLs) of the State Governments issued from time to time under the market borrowing programme; and
    • Any other instrument as may be notified by the Reserve Bank of India

The liquidity coverage ratio (LCR)

  • It refers to the proportion of highly liquid assets held by financial institutions, to ensure their ongoing ability to meet short-term obligations.
  • The LCR was introduced as part of the Basel III reforms following the 2008 global financial crisis and was finalised by the Basel Committee on Banking Supervision in January 2013.
  • LCR = High-Quality Liquid Asset Amount (HQLA) / Total Net Cash Flow Amount

Priority sector lending

  • Priority sector lending refers to those sectors or areas of the economy which may not get timely and adequate credit.
  • The RBI requires Indian banks to allocate certain portion of their overall lending for sectors mentioned under PSL. These areas of focus for PSL include Agriculture, Micro, Small and Medium Enterprises (MSME), Export Credit, Education, Housing, Social Infrastructure, Renewable Energy.
  • Reserve Bank of India has, from time to time, issued a number of guidelines to banks on Priority Sector Lending. These were last reviewed in  April 2015 and for urban and cooperative banks in May 2018.
  • PSL guidelines are applicable to all domestic scheduled commercial banks (excluding Regional Rural Banks and Small Finance Banks) and foreign banks with 20 branches and above.
economy RBI refuses exceptions on CRR