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Updated: September 13, 2012 19:42 IST

Large cash market main driver of corruption: RBI

PTI
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H. R. Khan
H. R. Khan

Stating that the circulation of a large amount of cash in the economy leads to many problems, including corruption, Reserve Bank Deputy Governor H R Khan on Thursday said the central bank is focused on bringing down the cash component in the economy.

“There is a need for the predominant cash in the society to go down,” Mr Khan told reporters at the sidelines of a Punjab & Maharashtra Cooperative (PMC) Bank event here.

He said if the cash component in the society goes down, it will help solve a lot of problems like rampant corruption, monetary policy transmission issues and cash management for banks at the operational level.

At present, the amount of cash circulating in the system is up to 14 percent of the GDP, which makes the country one of the highest markets that has cash circulation, he said, stressing on the need to bring down the ratio.

Only Japan has such high levels of cash, he said, without giving a target on the ratio.

Mr Khan said implementation of information and communication technology (ICT) solutions like mobile and online banking, core banking and electronic fund transfers can help bring down the reliance on cash.

Both the government and the RBI are taking efforts to bring down usage of cash, Mr Khan said, citing the case of compulsory use of electronic fund transfers for all transactions above Rs 25,000 adopted by the government.

When asked about the impact of a possible third round of quantitative easing as is being mooted by the US Federal Reserve which will increase liquidity globally, Mr Khan declined to comment saying the announcement is yet to be made.

He futher added that the RBI will soon be implementing the suggestions of the Malegam committee on cooperative banks, once “legislative issues” around it get solved.

Among other things, the committee recommended a dual structure approach of having a board of directors appoint a board of management to run the cooperative banks and relaxing the entry norms for cooperatives in the unbanked areas, Mr Khan said.

While speaking at the function to launch the mobile banking service of PMC, Khan exhorted the cooperatives to pull up their socks, noting that the sector has not grown as much as the RBI would have wanted it to grow.

Khan said the share of cooperatives in the overall banking business has gone down to around 4 percent from the earlier 6 percent.

He also appreciated other initiatives like improvement in the asset quality of cooperative banks and mergers of weaker banks with stronger ones

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