Banks in India are required to hold a certain proportion of their deposits with the Reserve Bank of India (RBI). This minimum ratio stipulated by the RBI is known as Cash Reserve Ratio (CRR). The RBI is empowered to prescribe CRR for scheduled banks without any floor rate or ceiling rate, keeping in view the needs of securing monetary stability in the country. Higher the CRR, lower the banks will be able to use for lending and investment.
Statutory Liquidity Ratio (SLR) refers to the minimum percentage of deposits the bank has to maintain in the form of gold, cash or other approved securities. The RBI is empowered to increase this ratio up to 40 per cent. Between September 1990 and February 1992, the SLR was as high as 38.5 per cent. SLR, which stood at 25 per cent in November 2009, came down to 24 per cent in December 2010 and was reduced to 23 per cent in the first quarter review of monetary policy held on July 31, 2012. On August 9, 2014, it was at 22 per cent. On April 2, 2016, it was reduced to 21.25 per cent from 21.5 per cent.
First, one should realise that while banks themselves maintain SLR in liquid form, CRR is with the RBI and is maintained as cash. CRR only involves cash and cash equivalents. SLR is a term used in banking only in India. As noted by RBI Governor Raghuram Rajan a year ago, CRR does not impact lending rates. CRR, which was nine per cent in August 2008, has been subject to gradual reduction over the last decade and was brought down to four per cent on February 9, 2013. In his review on April 6, 2016, the central bank kept the CRR unchanged at four per cent.
During 2012, former State Bank of India (SBI) chairman Pratip Chaudhuri called for phasing out the CRR. He said the CRR policy had denied the country growth, and its abolition would allow banks to lower the lending rate. Chaudhuri wanted the abolition of CRR and to raise SLR by 4.75 per cent; since the RBI did not pay any interest, the CRR acted like a tax on the banking system, placing the banks at a competitive disadvantage versus non-banking financial companies and mutual funds. According to him, the loss to the banking sector due to CRR was Rs 21,000 crore. It is rather strange that such a sweeping demand to abolish the CRR and increase the SLR by 4.75 per cent came from a professional banker, who should have known the difference between the two better than anybody else. While this could be music to the ears of an industry that has been shouting from the rooftop for a reduction in policy rates, it is necessary to examine if Chaudhuri's demand to abolish the CRR had any merit.
It is not as if Chaudhuri did not know the difference between CRR and SLR. If a bank falls short of its CRR requirements, the RBI collects interest on the shortfall from the bank at the bank rate as if the defaulting bank has borrowed that money from the central bank. While the RBI's action is justified, as it is the only way the central bank can enforce discipline among the banks, this is a source of irritation to the SBI. If CRR is abolished and replaced by SLR, Chaudhuri might have been happy as the SLR is maintained by the Bank itself and the question of paying any penal interest to the central bank would not arise. One should not miss the hidden agenda in the subtle suggestion made by the former chairman of the SBI.
In this connection, it needs to be mentioned that when the RBI freed the interest rate on savings accounts in October 2011, it was widely expected that the SBI, which has 38 per cent of its total deposits of Rs 9.5 lakh crore in savings accounts, would be among the first to hike the interest rate. In fact, Chaudhuri, chairman of the SBI then, told a TV channel that the bank was thinking of increasing the rate by 1.25 per cent. But to this day, the interest rate on savings accounts in the SBI remains at four per cent. While Rs 3.61 lakh crore, or 38 per cent of Rs 9.5 lakh crore, is available to the bank at as low as four per cent, it chooses to keep its peak lending rate at 14.75 per cent, with a margin of more than 10 per cent. It is strange that Chaudhari had called for the abolition of CRR saying it would permit banks to lower lending rates, thus helping industry! This was a classic case of the pot calling the kettle black. It is not correct to place the entire blame on the RBI for the failure to cut rates in India. Banks in India in general and the SBI, in particular, have to share at least 50 per cent of the blame in this regard due to their sheer non-cooperation with the RBI in this uphill task.
The RBI's reluctance to cut rates should be seen as a case of inability in the face of inflation, while the refusal of the SBI and other banks to cut lending rates is due to unwillingness to reconcile themselves to a lesser profit margin.
The author is a former staff member of the International Monetary Fund, Washington DC
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