CRR and SLR are two pivotal reserves that banks are supposed to keep for compliance with RBI norms. They are essential and effective measures used by RBI to manage systemic liquidity and stability in the banking sector. Nevertheless, maintaining CRR and SLR at the prescribed levels can be burdensome for banks, especially cooperative banks, at times. CRR reserve does not earn any interest from RBI and when the required CRR is too high, funds available for lending and investment decrease, limiting the bank’s ability to earn interest and profit on its deposits. On the other hand, if the SLR is too high, banks will have to maintain more reserves of liquid assets like cash, government securities, and gold, thereby limiting bank’s investments into higher yielding securities and thus limiting bank’s (investment) income. While failure to maintain the prescribed levels of CRR and SLR will invite penalties from RBI, banks do try their best to strike a balance between compliance and profitability.
In 2022, numerous banks incurred penalties for failing to maintain the Cash Reserve Ratio (CRR – currently at 4.50%) and the Statutory Liquidity Ratio (SLR – 18%), with a notable portion of these penalties imposed on Urban Cooperative Banks (UCBs). Aggressive lending and operational oversights likely contributed to their non-compliance, as they may have overlooked metrics related to these reserves, resulting in shortfall. In this article, we shed light on the importance of maintaining CRR and SLR figures for UCBs, as penalties can attract unreasonable scrutiny for UCBs which are otherwise healthy.
Scheduled Urban Cooperative Banks (UCBs) are directly regulated by the RBI, listed in the Second Schedule of the Reserve Bank of India Act, 1934. They face stricter regulations, allowing them to borrow from the RBI at the bank rate and access clearing house facilities. Non-Scheduled UCBs, not included in the Second Schedule, face less stringent regulations and lack eligibility for borrowing from the RBI at the bank rate or access to clearing house facilities.
Scheduled and non-Scheduled cooperative banks have similar reserve maintenance procedures but differ in reporting requirements. Scheduled Co-operative Banks need to report CRR maintenance using Form B Return, while non-scheduled Co-operative Banks must report it through Form I Return under Section 18 of the Banking Regulation Act, 1949. For SLR, the format is the same for both Scheduled and non-Scheduled UCBs, they use Form I return.
Cash Reserve >= CRR% * NDTL (Net Demand and Time Liabilities)
CRR is currently 4.5%
Statutory Liquidity Reserve >= SLR% * NDTL
SLR is currently 18%
Net Demand and Time Liabilities (NDTL) = (Demand Liabilities +Time Liabilities + Other Demand and Time Liabilities + Liability to Others) – Assets with the Banking System.
Scheduled Banks keep the reserves with RBI in the Principal Account which is in the Deposit Accounts Department (DAD) of RBI whereas Non-scheduled UCBs have to keep the reserves equivalent to the RBI-prescribed rates in a current account with the Reserve Bank or the state co-operative bank of the respective state, or by having a net balance in current accounts. In the case of a primary (Urban) co-operative bank, the requirement can also be met by maintaining balances with the District Central Co-operative bank of the relevant district.
To maintain the day-to-day position of liquidity, all UCBs are required to maintain a register showing the daily position of cash reserve and liquid assets maintained. This can be delegated to a responsible official. However, it is the CEO who must ensure compliance with the statutory liquidity requirements at the close of business every day. Annuity Risk’s compliance suite automates this entire process.
UCBs are liable to pay penal interest if the daily balance of CRR falls below the prescribed minimum. The penal interest rate is three per cent per annum above the Bank Rate (6.75% now) for the shortfall on the day of default, increasing to five per cent per annum above the Bank Rate if the shortfall continues on subsequent days. In cases of average shortfall in CRR maintenance during a fortnight, penal interest will be recovered as per the provisions of Section 42(3) of the Reserve Bank of India Act, 1934. Failure to maintain the required SLR amount or submit prescribed returns on time can also lead to penalties under Section 24 read with Section 56 of the Banking Regulation Act, 1949. Persistent defaulting despite instructions may result in additional penalties or even cancellation of licenses by the Reserve Bank of India.
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Copyright © 2023 Annuity Risk India Pvt. Ltd.