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What is Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)?

Banks are required to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) at the rates prescribed by Reserve Bank of India (RBI).

Which banks are required to maintain CRR and SLR?

The following banks are required to maintain CRR and SLR at the rates prescribed by RBI.

  1. All Scheduled Commercial Banks (SCBs) (including Regional Rural Banks)
  2. Small Finance Banks (SFBs)
  3. Payments Banks
  4. Local Area Banks (LABs)
  5. Primary (Urban) Co-operative Banks (UCBs)
  6. State Co-operative Banks (StCBs) 
  7. District Central Co-operative Banks (DCCBs)

What is Cash Reserve Ratio (CRR)?

Every bank is required to maintain in India by way of cash reserve, a certain percent of its Net Demand and Time Liabilities (NDTL) in India, as RBI in terms of Section 42(1) of Reserve Bank of India (RBI) Act, 1934 and Section 18(1) of Banking Regulation Act, 1949 [including provisions of Section 18(1) of BR Act as applicable to cooperative banks], may specify.

What is incremental CRR?

In terms of Section 42(1A) of RBI Act, 1934, RBI may require the scheduled banks to maintain, in addition to the balances prescribed under Section 42(1) of the Act, an additional average daily balance.

How is CRR to be maintained by banks?

The CRR is to be maintained as an average daily balance, of not less than 4% of the bank’s total NDTL in India as on last Friday of the second preceding fortnight.

Every scheduled bank, small finance bank and payments bank shall maintain minimum CRR of not less than 90% of the required CRR on all days during the reporting fortnight, in such a manner that the average of CRR maintained daily shall not be less than the CRR prescribed by RBI.

A lag of one fortnight is allowed to banks to maintain CRR based on the NDTL of the last Friday of the second preceding fortnight.

Do banks earn interest on CRR balances?

RBI does not pay any interest on the CRR balances maintained by SCBs.

What are the reporting timelines for CRR?

  • Under Section 42(2) of RBI Act, 1934, banks shall submit to RBI a provisional Return in Form 'A' / Form ‘B’, at the close of business on each alternate Friday, within 7 days of the fortnight to which it relates.
  • Where such reporting Friday is a public holiday under the Negotiable Instruments Act, 1881, the Return shall give the preceding working day’s figure.
  • The final Return in Form 'A' / Form ‘B’ shall be submitted to RBI within 20 days from expiry of the relevant fortnight.
  • Where the last Friday of a month is not a reporting Friday, the bank shall send to RBI, a special Return in Form A / Form B, within 7 days of the date to which it relates.

What if banks fail to maintain the requisite CRR?

If the daily balance of cash reserve (CRR) held by a bank during any fortnight is below the minimum prescribed, the bank is liable to pay to RBI, penal interest @ (3% p.a. + Bank Rate) on the shortfall amount for that day and if the shortfall continues on the next succeeding days, penal interest shall be recovered @ (5% p.a. + Bank Rate).

In cases of shortfall in maintenance of CRR on average basis during a fortnight, penal interest is recovered as envisaged in Section 42(3) of RBI Act, 1934.

In terms of section 42(3A) of RBI Act, 1934, penal interest at increased rate of (5% p.a. + Bank Rate) become payable and if the default continues during the next succeeding fortnight –

  • Every Director / Manager / Secretary of the scheduled bank / Small Finance Bank / Payment Bank who is knowingly and willfully a party to the default, shall be punishable with fine up to Rs.500 and with a further fine up to Rs.500 for each subsequent fortnight during which default continues.
  • RBI may prohibit scheduled bank / Small Finance Bank / Payments Bank from receiving any fresh deposit after the said fortnight, and if default is made by the bank in complying with the prohibition, every director and officer of the bank who is knowingly and willfully a party to such default or who through negligence or otherwise contributes to such default shall be punishable with fine up to Rs.500 and with a further fine up to Rs.500 for each day on which a deposit received in contravention of such prohibition is retained by the scheduled bank.

What is Statutory Liquidity Ratio (SLR)?

In addition to the cash reserves, banks shall maintain in India assets (SLR assets) the value of which shall not, at the close of business on any day, be less than 18% (not exceeding 40%) of their total net demand and time liabilities in India as on the last Friday of the second preceding fortnight. 

What is Marginal Standing Facility (MSF)?

Banks permitted by RBI shall have the option to participate in Marginal Standing Facility (MSF) Scheme. The features of the scheme are as below –

  1. Eligible banks can dip up to 2% in their SLR holdings.
  2. In such cases, banks shall not have the obligation to seek a specific waiver for default in SLR compliance arising out of use of this facility.
  3. Within the mandatory SLR requirement, Government securities to the extent allowed by RBI under MSF as well as remaining SLR holdings, are permitted to be reckoned as Level 1 High Quality Liquid Assets (HQLAs) for the purpose of computing Liquidity Coverage Ratio (LCR) of banks. 

How is SLR to be maintained by banks?

The SLR can be maintained by banks in the following forms –

  1. Cash
  2. Gold
  3. Unencumbered investment in any of the following approved securities / SLR securities –

    • Dated securities of the Government of India 
    • Treasury Bills of the Government of India
    • Cash Management Bill (CMB) 
    • State Development Loans (SDLs) of the State Governments 
    • Any other instrument as may be notified by RBI (as and when prescribed)

What are the reporting timelines for SLR?

Banks shall submit to RBI before 20th day of every month, a Return in Form VIII showing the amount of SLR held on alternate Fridays during the immediate preceding month or if any such Friday is a public holiday under the Negotiable Instruments Act, 1881, at the close of business on the preceding working day.

Who has final decision on nature of the transaction?

If any question arises as to whether any transaction shall be regarded as liability in India of a bank, the bank shall approach RBI. The decision of RBI thereon shall be final.

What if banks fail to maintain the requisite SLR?

On the failure of the bank to maintain as on any day, the required amount of SLR, the bank shall be liable to pay to RBI, the penal interest as envisaged under Section 24 of Banking Regulation (BR) Act, 1949.

Failure to submit the prescribed return in time will attract the provisions of Section 46(4) of BR Act, 1949.

Where it is observed that banks are persistently defaulting despite instructions and repeated advice, RBI in addition to levy of penalty on such defaulting banks, may be constrained to consider cancelling the licence in case of licensed banks and refuse licence in case of unlicensed banks under Section 22 of BR Act, 1949. 

What are the recent updates on CRR and SLR guidelines?

The amounts received by a bank from the National Credit Guarantee Trustee Company Ltd towards claims in respect of guarantees invoked and held by them pending adjustment of the same towards the relative advances, need not be treated as outside liabilities for the purpose of computation of NDTL for CRR and SLR.


References

Reserve Bank of India. (2021, July 20). 'Master Direction - Reserve Bank of India [Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)] Directions - 2021 (Updated as on April 06, 2022)'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12131

Reserve Bank of India. (2022, October 13). 'Claims Received from the National Credit Guarantee Trustee Company Ltd (NCGTC) - Classification for the Purpose of Maintenance of Cash Reserve Ratio (CRR)/Statutory Liquidity Ratio (SLR)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12403&Mode=0

Reserve Bank of India. (2022, August 29). 'The Reserve Bank of India Act, 1934'. Retrieved from https://rbi.org.in/Scripts/OccasionalPublications.aspx?head=Reserve%20Bank%20of%20India%20Act


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