The system of cash reserve ratio should be phased out as the original reasoning behind the cash reserve ratio has been diluted over time, State Bank of India Chairman Pratip Chaudhuri said here on Thursday. “There were compelling reasons to have a re-look at CRR as a policy instrument. In effect, the CRR policy has possibly denied the country growth, income and taxes,” he said.

Speaking at the FICCI Banking conclave here on Thursday, the chief of the country’s largest banker urged industry bodies such as FICCI to pursue the matter, as a phasing out of CRR would allow banks to lower lending rates thus helping industry.

Section 42 of the RBI Act authorises the central bank to notify the quantum of the cash reserve ratio to be maintained by the scheduled bank by way of a deposit with the RBI.

The provision has served the twin purpose of impounding resources to curb speculative lending and ensuring liquidity reserve for banks and is also used as a tool to control inflation.

“It is not my case that CRR be abolished entirely tomorrow. However it does need to be phased out within a reasonable period of time,” he said. He further said that huge amount of fund could be unlocked in this manner.

“The lack of capital constrains banks from expanding their balance sheets. But for this constraint on capital, the Indian banking system would have been 25 per cent larger, and, as a corollary the Indian economy too would have been 25 per cent bigger”, Mr Chaudhri said.

He later told reporters that the matter was being pursued with the central bank.SLR securities were adequate as a solvency and liquidity reserve and additional pre-emption towards CRR was largely superfluous, according to Mr. Chaudhuri. If the CRR was a liquidity mop-up tool, then it should be applied to insurance companies, NBFCs and debt mutual funds.

Responding to question as to whether he would favour a lowered rate of both CRR and SLR, the SBI Chief said: “I prefer abolition of CRR rather than reduction of rates of CRR and SLR—the impounded CRR amount stays sterilised in vault. In case of SLR, we get some return at least”, he said.