‘It is a tool to manage liquidity, but can also have monetary implications’

Reserve Bank of India (RBI) Deputy Governor Subir Gokarn, on Tuesday, said that the Cash Reserve Ratio (CRR) had multiple attributes. It clearly had merits from a regulatory point of view, he added. Dr. Gokarn’s statement came a day after Chairman of the country’s largest lender, State Bank of India (SBI) Pratip Chaudhuri, reiterated that the cut in CRR was the most effective instrument to cut interest rates.

“The CRR is an instrument with multiple attributes. It is a tool to manage liquidity, which is often an end in itself, but can also have monetary implications,” said Dr. Gokarn in an interview with The Hindu.

Dr. Gokarn is in charge of Monetary Policy.

“It (CRR) is also a prudential tool. Its utility was established some years ago when, after having decided to freeze it at 3 per cent, it was brought back into play when large capital inflows were exerting some pressure on the domestic financial system,” said Dr. Gokarn. Mr. Chaudhuri had said that CRR should be phased out as it has outlived its utility and was a drag on the productivity and profitability of banks.

The SBI Chairman had made these remarks in August. The RBI Deputy Governor in charge of Banking Supervision, K. C. Chakrabarty, however, did not agree with this view and asked Mr. Chaudhuri to work within the rules laid down by the regulator. He went on to add: “If you are not able to do business in the regulatory system in which you are functioning… you will have to find out something else … where you can do business,”

In early September, while addressing a banking conference in Mumbai, Mr. Chaudhuri had repeated his argument on CRR saying that it should be phased out completely, and made a pitch for a national debate on the subject: “Nobody is giving any reason why it cannot be abolished.”

According to Mr. Chaudhuri, parking the mandatory funds (CRR) with the RBI without any interest on it is a heavy loss for banks. Mr. Chaudhuri had also said that the banks needed a level-playing field as insurance companies and non-banking finance companies (NBFCs) were not required to keep such mandatory funds with regulators

Since then, the RBI reduced the CRR by 25 basis points on September 17 from 4.75 per cent to 4.50 per cent, and the SBI cut its base rate from 10 per cent to 9.75 per cent. Further, the SBI has reduced the Benchmark Prime Lending Rate (BPLR) by 25 bps from 14.75 per cent per annum to 14.50 per cent per annum with effect from September 27, 2012. SBI is the only bank so far, which cut rates after the mid-quarter review of the monetary policy by the RBI last week.

While trying to score a point, reiterating his earlier stand on the issue on Monday last, Mr. Chaudhuri said, “We have been consistently of the view that the correlation between the CRR and the bank lending rate is very strong, and, if the objective is to reduce the bank lending rate, then CRR cut possibly is the most effective instrument for this purpose.”

“Obviously,” said Dr. Gokarn, “from the perspective of the business of banking, it is a cost, because it ties up funds without any return. But, from a regulatory perspective, which has to take a systemic view, it clearly has merits.”

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