For many years, the fractional reserve banking framework has served as the core foundation of India's financial sector. This system, fundamentally tied to the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR), dictates how banks manage their deposits and lending capacities. However, experts are now raising a crucial question: has the time come to reassess these long-standing mechanisms?
The Bedrock of Indian Banking
The cash reserve ratio (CRR) mandates that commercial banks must keep a specific portion of their net demand and time liabilities as a reserve with the Reserve Bank of India (RBI). This money does not earn any interest. Similarly, the statutory liquidity ratio (SLR) requires banks to maintain a predetermined percentage of their deposits in safe and liquid assets, such as government securities. Together, these ratios have been instrumental in ensuring banking stability and controlling liquidity in the economy for decades.
Mounting Calls for a Strategic Review
In a significant opinion piece, financial analysts Vasant G Hegde and Lalan Mishra have highlighted the need to re-examine these traditional constraints. They argue that while CRR and SLR have provided a safety net, they also act as "shackles" that potentially limit the banking sector's ability to extend more credit to productive sectors of the economy. The core of their argument suggests that these mandatory reserves tie up a substantial amount of capital that could otherwise be used for lending to businesses and individuals, thereby stimulating economic growth and investment.
Potential Implications and the Path Forward
A revision of the CRR and SLR framework could have wide-ranging consequences. On one hand, a reduction in these ratios would free up significant funds for banks, potentially leading to lower borrowing costs and increased loan availability. This could be a major boost for startups, industry, and infrastructure projects. On the other hand, regulators would need to carefully balance this with robust alternative mechanisms to ensure financial stability and prevent inflation. The debate, as framed by Hegde and Mishra, centers on modernizing India's banking reform toolkit to better align with contemporary economic goals, moving beyond a system designed for a different era. Their commentary, published on 01 January 2026, adds a timely voice to the ongoing discourse on India's financial future.
