The RBI is expected to announce steps to boost sagging economic growth

Ahead of mid-quarter review of monetary policy, the Finance Ministry, on Tuesday, made a case for lowering of the Cash Reserve Ratio (CRR), saying it would improve credit flow and spur economic growth.

“CRR is an issue addressed by the regulator (the Reserve Bank of India), but as owner of banks when we have to meet Basel III requirement, we will welcome CRR cut,” Department of Financial Services Secretary D. K. Mittal said on the sidelines of the meeting of heads of PSU banks with the Finance Minister here.

CRR is the portion of deposits that banks are required to keep with the central bank.

The RBI, in its mid-quarter review of monetary policy on June 18, is widely expected to announce steps to boost sagging economic growth, which dipped to nine-year low of 6.5 per cent in 2011-12.

Mr. Mittal further said, “This (CRR cut) is monetary policy issue but you have to understand two aspects. CRR today is 4.75 per cent, that is, the amount of money which is deposited by the commercial banks with the RBI. I think banks have a cost, there is no money paid to them.”

Basel III norms

There was Basel III requirement, he said, adding that, “there is deposit of Rs.65 lakh crore, there is Rs.3.20 lakh crore deposit with the RBI which is interest free.”

The second side, he said, if that much money released in the banking system to that extent credit flow would be available.

“What impact would it have on the inflation? If there is any (cut) would it have an impact on inflation and, if so, what impact it would have? So, these are the two things which have to be balanced. It is in the domain of the RBI to look at these issues,” he said.

“But, as owner of the banks, I would certainly like CRR to go down...as early as possible,” he said.

In March, the RBI had cut the CRR by 0.75 percentage point to 4.75 per cent to infuse liquidity in the market. Besides, it had reduced the CRR by 0.50 percentage point to unlock primary liquidity in January as well.

Meanwhile, many banks, including State Bank of India, also pitched for reducing CRR so that their profitability could be improved. Asked if the Ministry favours cut in interest rate, Mr. Mittal said, “Unless the interest rate is lower, there is difficulty in having higher growth rate. Today higher interest rate is feeding into inflation.”

On the restructuring of loans given to the stressed sector, especially power distribution companies and the textile sector, he said, the process was under way to restructure these loans as per the existing regulation.

About Rs.1.30 lakh crore loan have been given to discoms and nearly Rs.35,000 crore loan outstanding of the textiles sector.

On the fresh lending to telecom sector for auction of 2G spectrum, Mr. Mittal said, “We are having internal consultations. We are taking legal opinion. Issues are being resolved. Once issues are resolved then I think bankability will be there.”

Issues were likely to be resolved in a week or two ensuring protection capital, he said.

The Finance Ministry has proposed tripartite agreement to be executed with regard to auction of spectrum.

“We have taken inputs from the banks. SBI Capital Markets have done this work for us. Then this agreement has been sent to them (banks) about two months. There have been two or three meetings. We will have another one or two meetings then we will close this,” he said.

The Telecom Department would offer the agreement to those who participate in the bids. This will be between banks, the Department of Telecom and the bidder, he added.

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