Government reduced SLR to 24% and has now CRR to 4.75% to increase profitability of banks who have lost their interest income in bad assets accumulated and concealed in the system.

RBI is releasing cash called as liquidity which was hitherto kept with RBI as safety valve. SLR has been decreased from 40% to 24% during last few years to ensure credit growth and CRR has been reduced to 4.75% to increase liquidity in the banking system and in turn increase credit growth. Still there is no hope of improvement. Let us see what happens in future. Bitter truth is that this sudden reduction in CRR will help crisis ridden banks to pay their  advance tax in time .

It is true that banks will be in a position to sanction more and more loans but as long as repayment of loan is not ensured, problem of liquidity crisis will undoubtedly recur again and again and assume critical proportion in near future. As a matter of fact it is unregulated credit growth undertaken by inefficient and ill motivated bankers which has resulted in increase in bad assets and erosion in profitability.

Government use SLR and CRR to contain inflation and to restrict money supply. It is unfortunate that instead of striking at the root of crisis in banks, RBI is willingly or unwillingly adding fuel to fire. How much relief will RBI provide by these temporary measures, God only knows but it is certain that consequence of bad policies and inefficient management of SLR and CRR will have to be borne by none other than investors and depositors?

Chandra Sekhar during his period of Prime Minister in India sold gold to control the economy, present government is providing stimulus package by way of reduction in SLR and CRR or by resorting to sell of government assets in the name of disinvestment. Undoubtedly such stimulus packages will help rich to grow richer and force poor to become poorer. Rich people  will get loan at lower rates and poor will be thrown in the hands of Micro finance Institute who are another form of moneylenders and extortionist as well as exploiters for poor villagers.

Time will say whether the remedy provided will add to the agony of economy or provide relief to sick economy.

 I however feel it is investors and depositors who will ultimately suffer the loss. I apprehend poor will have to bear the burden of increase in taxes and curtailment in subsidies and there is very less probability of poor getting any benefit through reduction in SLR or CRR or through disinvestment of public sector undertakings.

http://dkjain497091112006.blogspot.in/2012/03/slr-and-crr.html