During
the past few weeks, in the newspapers and televisions, many would have read,
saw, and heard that whether CRR is required or it should be abolished? In fact,
the close follower of this news would have noticed that the debate was
initiated by SBI chairman, Mr. Pratip Chaudhuri and in response to his comment
(on abolishing the CRR) RBI Deputy Governor Mr. K. C. Chakrabarty said that CRR
is the only and important tool with RBI and it cannot be abolished.
This row has become a big debate now. Recently, Reserve Bank of India Governor D. Subbarao made a prank up his sleeve at a banking summit in Mumbai. In serious tone he announced that central bank has set up a ‘committee’ to review the need to retain the much-debated cash reserve ratio (CRR)” But when the Governor revealed the names of the committee members and its conditions, people realised he was only joking. He said that “The members of the committee, Subbarao said, would be Pratip Chaudhuri, Chairman, State Bank of India, and K.C. Chakrabarty, Deputy Governor, RBI. Both, with opposite views on CRR (the percentage of deposits that banks need to keep with RBI), have sparred over the issue.” He also went on to say further that “the two conditions for such a committee would be: First, the two members would be locked up in a room till they come to an amicable solution. And, second, the findings of the committee should not be made public until his own term as Governor comes to an end.”
So let us see the main reason why SBI chairman said CRR is not required. The main reason for it is that CRR has come down from its peak level of 15% in 1994 to 4.75% at present. Few years ago RBI had ceased to pay interest rate on CRR, which affects the commercial banks. This is one of the main reasons why SBI chairman wanted CRR to be abolished. SBI chairman had got some support for his view from Former RBI governor and present chairman of the Prime Minister's Economic Advisory Council (EAC) C Rangarajan; he said on that there is a need to bring down the cash reserve ratio as the instrument is no longer used in credit control and liquidity management. In his own words "We need to move towards a situation in which the level of CRR comes down and it is used as an instrument of credit control only in extraordinary circumstances," he also stated that "As OMO (open market operations) becomes increasingly a major instrument of credit control, the role of CRR as an instrument of credit control will come down,".
Here are 2 more articles on this debate 1. CRR harsh on public sector banks
2. CRR has outlived utility
My perspective with a Thank Note:
When one reads the debate then one may come to a quick conclusion that SBI governor is right and CRR should be abolished. If CRR is abolished then what are the other tools through which RBI can control credit and inflation? (Even though this is not the only tool to the do this, but one of the major tool for RBI). No doubt as EAC chairmen said that OMO becomes increasingly a major instrument of credit control, but at the same time we cannot ignore or doubt the credibility of CRR. The Problem with commercial banks is few years back RBI had stopped paying interest rates on the cash reserves; this affects the business of the commercial banks, because without any incentive when the cash is kept then it is no use for anybody. RBI need to find a amicable solution to stop this debate, either by paying some interest rates or through some other incentives.
I wanted to end this big post with a THANK note to all the Visitors who had viewed, read, visited and commented on this blog. Today, with the help and support from all of you, this blog had crossed 4000 visitors (which you can see in the left side of the screen). I Thank all of you again for giving your support and encouraging me to keep posting in this Blog. THANKS ALL
Before
going further let us see what exactly CRR is and its purpose? Cash Reserve Ratio (CRR) is ratio of reserves
at which commercial banks must hold or deposit with the central Bank. In other
words it is a central bank regulation that sets the minimum reserves that each
commercial bank must hold physically in bank vaults or as deposits made with
the central bank. This reserve can be maintained either in cash, gold or
unencumbered government securities.
The
reserve requirement, on one hand, helps the bankers to have enough cash to meet
any crisis and on the other hand, they serve as tools for Central Bank to control
the liquidity in the system in order to manage the Inflation. When CRR is
altered then the interest rates will be changing as per availability of funds
with the commercial banks.
Now
coming back to the debate that SBI Chairman said Abolish Cash Reserve Ratio, he said that "CRR
does not help anybody. It is locked up in the vault and not ploughed back into
the economy. It is unfairly applied on banks. If CRR is a liquidity mop-up
tool, why not apply it to insurance companies, NBFCs and debt mutual funds, who
as well mobilize deposits from the public?" he asked.
After
three days of SBI chairman commented the RBI Deputy governor K C Chakrabarty commented that “the banks must work within the frame work of the regulatory norms”. He
also said that “If SBI is not protected, the risk may catch other banks leading
to a systemic failure and SBI is too big to fail.” He further went on to say that
“If the SBI Chairman is not able to do business as per our regulatory
environment, he has to find some other place”
This row has become a big debate now. Recently, Reserve Bank of India Governor D. Subbarao made a prank up his sleeve at a banking summit in Mumbai. In serious tone he announced that central bank has set up a ‘committee’ to review the need to retain the much-debated cash reserve ratio (CRR)” But when the Governor revealed the names of the committee members and its conditions, people realised he was only joking. He said that “The members of the committee, Subbarao said, would be Pratip Chaudhuri, Chairman, State Bank of India, and K.C. Chakrabarty, Deputy Governor, RBI. Both, with opposite views on CRR (the percentage of deposits that banks need to keep with RBI), have sparred over the issue.” He also went on to say further that “the two conditions for such a committee would be: First, the two members would be locked up in a room till they come to an amicable solution. And, second, the findings of the committee should not be made public until his own term as Governor comes to an end.”
So let us see the main reason why SBI chairman said CRR is not required. The main reason for it is that CRR has come down from its peak level of 15% in 1994 to 4.75% at present. Few years ago RBI had ceased to pay interest rate on CRR, which affects the commercial banks. This is one of the main reasons why SBI chairman wanted CRR to be abolished. SBI chairman had got some support for his view from Former RBI governor and present chairman of the Prime Minister's Economic Advisory Council (EAC) C Rangarajan; he said on that there is a need to bring down the cash reserve ratio as the instrument is no longer used in credit control and liquidity management. In his own words "We need to move towards a situation in which the level of CRR comes down and it is used as an instrument of credit control only in extraordinary circumstances," he also stated that "As OMO (open market operations) becomes increasingly a major instrument of credit control, the role of CRR as an instrument of credit control will come down,".
Here are 2 more articles on this debate 1. CRR harsh on public sector banks
2. CRR has outlived utility
My perspective with a Thank Note:
When one reads the debate then one may come to a quick conclusion that SBI governor is right and CRR should be abolished. If CRR is abolished then what are the other tools through which RBI can control credit and inflation? (Even though this is not the only tool to the do this, but one of the major tool for RBI). No doubt as EAC chairmen said that OMO becomes increasingly a major instrument of credit control, but at the same time we cannot ignore or doubt the credibility of CRR. The Problem with commercial banks is few years back RBI had stopped paying interest rates on the cash reserves; this affects the business of the commercial banks, because without any incentive when the cash is kept then it is no use for anybody. RBI need to find a amicable solution to stop this debate, either by paying some interest rates or through some other incentives.
I wanted to end this big post with a THANK note to all the Visitors who had viewed, read, visited and commented on this blog. Today, with the help and support from all of you, this blog had crossed 4000 visitors (which you can see in the left side of the screen). I Thank all of you again for giving your support and encouraging me to keep posting in this Blog. THANKS ALL
