State Bank of India Chairman Pratip Chaudhuri has suggested phasing out cash reserve ratio (CRR) as it pushes up the cost of funds for industry. CRR is the portion of deposits banks must keep with the Reserve Bank of India. Banks earn no interest on such funds (currently, 4.75 per cent of total bank deposits).
According to Chaudhuri, the rationale for a CRR, strong though at one time, has lost much of its validity now.
“If 4.75 per cent doesn’t earn any income, then my balance resources will have to earn for the rest (to make up for the loss of interest on CRR) which is leading to a cost increase for the industry without benefiting anybody,” Chaudhuri said at a banking conclave organised by the Federation of Indian Chambers of Commerce and Industry here on Thursday.
SLR, sufficient
“It is not my case that CRR be abolished entirely tomorrow. However, it does need to be phased out within a reasonable time-frame as impounding of this large quantum of lendable resources in a capital-scarce economy with vast requirement for infrastructure, does not stand to reason,” he said.
Chaudhuri said SLR deposits were sufficient to address the issues of solvency and liquidity, and additional pre-emption towards CRR was largely superfluous. The loss incurred by the banking industry for keeping interest free-CRR deposits was close to Rs 21,000 crore, while for SBI it was close to Rs 3,500 crore, he said.
Underlining the importance of the cash reserve ratio, an RBI spokesperson said it was not just a monetary tool but also a prudential instrument that gave banks liquidity cushion.
According to Chaudhuri, till the CRR is phased out, the RBI should consider paying interest on the impounded funds at a rate that at least corresponds to the savings bank rate.
“These funds have an opportunity cost, in terms of foregone lending opportunity. Thus, holding back funds and keeping them idle hurts overall production, affects growth and leads to stunting of banks,” he said.
The RBI spokesperson, however, clarified that paying interest on CRR, primarily a liquidity mop-up tool, would defeat the very purpose of the instrument.