Outgoing RBI Governor D. Subbarao, who had disagreed with the bankers’ call to further trim the cash reserve ratio (CRR) or pay interest on these deposits and cut SLR, on Tuesday said “perhaps” there is a need to reduce these rates.
“I do recognise that there is a demand, and perhaps a need, for further reduction (in CRR and SLR),” he told the FIBAC summit, the premier annual banking summit in Mumbai.
The Governor, however, said RBI has “progressively” brought down mandatory ratios on both CRR or the portion of deposits banks park with RBI as a solvency buffer, and SLR, another solvency tool under which banks have to subscribe to government bonds and other liquid assets, over the years.
Dr. Subbarao, after a five-year tenure, will demit office on September 4 and new Governor Raghuram Rajan will assume office the next day.
Currently, the CRR is pegged at a low of 4 per cent, while SLR that includes securities such as government bonds, stands at 23 per cent, down from 25 per cent in 2010.
There have been demands from bankers for further reduction of CRR.
Describing CRR as “dead money”, SBI Chairman Pratip Chaudhuri had earlier said that if RBI could not reduce this requirement further, at least banks should be paid interest on this deposit.
While RBI has brought down short term lending rates by 125 bps since March 2012, there was only a 30 bps reduction by banks in their lending rates, as they have to attract deposits by paying high interest rates.
Though CRR and SLR have been retained at low level to prop up rupee availability, the RBI, since last month, has increased the call money rates by 300 bps to 10.25 per cent.
Dr. Subbarao also cautioned against taking away the regulatory oversight on NBFCs from RBI and placing them under a Unified Financial Authority, saying such a move will go against financial stability and whittle down the impact of monetary policy.
Stating that there are strong inter-linkages between banks, NBFCs and other deposit-taking entities, he said for monetary policy to be effective and financial markets to remain stable, they should be regulated by the central bank.
“A unified regulation by the same regulator (RBI) is essential for financial stability as there are strong inter-linkages between banks and deposit-taking non-banking financial companies. (Moreover), for monetary policy to be effective, credit creation by banks and credit institutions like NBFCs should be regulated by the central bank,” the outgoing RBI Governor told the FIBAC.
Explaining the reasons for his reservations against the move and why the RBI should regulate both banks, non-banking entities and all other deposit-taking bodies, Dr. Subbarao said, “One of the major causes for the 2008 financial crisis was that credit intermediation activities were conducted by non-banks or the so-called shadow banks, which were primarily outside the regulatory purview.
“This raised serious concerns of regulatory arbitrage, requirements for similar regulation of entities performing similar activities and issues of commonality of risks and synergies of unified regulation for such entities.”
He further said the country is going against the global trend wherein after the 2008 crisis, most of the leading governments have been entrusting more, and not less, regulatory powers to the central banks.
Following the 2008 global credit crisis, the government constituted the Financial Sector Legislative Reforms Commission (FSLRC) “with a view to rewriting and cleaning up the financial sector laws and to bring them in tune with the current requirements”, and the commission chairman retired justice BN Srikrishan had submitted report in March 2013.