An interesting debate on CRR has been initiated by State Bank of India (SBI) Chairman Pratip Chaudhuri. But the response of Reserve Bank Deputy Governor K C Chakrabarty to the debate was rather uncharitable. In fact, the remarks of the Chairman of India’s largest and oldest bank on the issue of CRR deserve to be taken seriously.

The CRR mechanism had lost its relevance as a monetary tool in post reforms and post-technology (or ‘core banking solutions’) banking. With latest management information system tools, the RBI is able to get the requisite banking figures more accurately at weekly intervals. Data integrity is almost 100 per cent, unlike in the earlier era. SLR (statutory liquidity ratio) is more than adequate as a monetary tool, and also a resource platform for government borrowings. So, why have an additional instrument in this age of data awareness?

NO BASIS

For stability and soundness of the banking system, the RBI insists on capital adequacy ratio in tune with latest Basel norms. To assess the strength of each bank in all parameters, ‘CAMELS’ (C – Capital adequacy, A – Asset quality, M – Management quality, E – Earnings, L – Liquidity, S – Sensitivity to Market Risk) is monitored by the RBI through its annual inspection mechanism.

Therefore, continuance of CRR, more so without any interest payout, has lost all purpose. Much of a bank’s manpower and top management time is spent maintaining CRR on a daily basis, and this is avoidable. Banks are customers to RBI, as far as maintenance of cash balances with the central bank is concerned. Their demand from the RBI is akin to a bank demanding cash margin from a borrower, and paying interest on the cash margin.

Therefore, the RBI cannot justifiably refuse to pay interest on CRR balances to its customer banks when it is earning around Rs 12,000 crore surplus every year.

ENCOURAGE DEBATE

The SBI Chairman needs to be appreciated for raising the issue of CRR relevance in the changed circumstances. Other bank chairmen, both in the public and private sector, should rally behind him to persuade the RBI to revisit the issue.

The RBI should pay interest on CRR balances of its commercial bank clients. It also needs to be open-minded to encourage free and frank discussion from the banking industry on many regulatory issues, for the evolution of a healthy banking system.

(The author is former Managing Director, AP State Cooperative Bank Ltd.)

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