SBI wants CRR phased out for 'more efficient' banking

Kolkata: The country's largest public sector lender, the State Bank of India (SBI) has strongly proposed phasing out of Cash Reserve Ratio (CRR) to make the banking industry "more efficient", SBI chairman Pratip Chaudhuri said on Thursday.

"CRR doesn't help anybody. It is unfairly put on the bank. Why is the CRR not applied to insurance companies, NBFCs and mutual funds who are also capable of mobilising deposits from the public?" Chaudhuri asked, while talking to reporters on the sidelines of a FICCI programme.

CRR is the percentage of deposits that commercial banks must keep with the central bank.

Chaudhuri said that as the RBI did not pay any interest on CRR, this acted as a tax on the banking system, placing the banks at a competitive disadvantage vis-a-vis NBFCs and mutual funds. Currently, CRR is 4.75 percent of the total bank deposits.

Chaudhuri pointed out that the rationale for a CRR, which had served the twin purposes of impounding resources to curb speculative lending and ensuring an adequate liquidity reserve for banks, has currently lost much of its validity.

Statutory Liquidity Ratio (SLR), which now stands at 23 per cent, was adequate as a solvency and liquidity reserve and additional pre-emption towards CRR was "largely superfluous", he stated.

SLR is the amount of liquid assets or securities that commercial banks must maintain as reserves other than the cash.

'It (CRR) doesn't help RBI, doesn't help banks, the industry or the country either. We have recommended every time to the RBI for phasing out of the CRR. Most of the banks, even the finance ministry, have made the point to the RBI,' he said.

He said as the CRR did not earn any interest, it was leading to cost increase for the industry 'without benefiting anybody'. According to him, the loss to the banking sector because of CRR was to the tune of Rs 21,000 crore.

If that money was released in the market, then production of the country in a lot of sectors would increase, he said.

If the central bank does not do away with the CRR because of inflationary concerns, it could pay interest on it to the banks or could raise the SLR by 4.75 per cent, he observed. 'But I would prefer abolition of CRR...it is an unnecessary burden. We are better off without it,' the SBI chairman added.