Not just CRR, other monetary tools like government bond holdings & lending must also be debated

Arithmetic shows that for the banking system as a whole Rs 17.4 lakh crore is locked up in these two provisions. Is so much required in a system where 75% of the banking industry is still owned by the state. If it argues it is like any other investor, the argument for state-ownership also evaporates. Lowering of these reserve requirements theoretically would release that much funds for private entrepreneurship, bringing down the cost of funds in general .

“I agree that CRR and SLR have to come down,” says Deepak Parekh, chairman , HDFC, which controls HDFC Bank. “We have never thought of brining it down. We have to bring it down. Does any other country have this much? So I am in favour of brining it down and giving a nominal interest on CRR.” But both these instruments in the hands of the central bank have transformed into an effective monetary tool when its policy rate adjustment does not get transmitted to market.This also provides stability.




“I think the monetary authority in its wisdom uses all these tools as appropriate and that’s what is being done,” says KV Kamath, chairman, ICICI Bank. This (CRR) is nothing new. India always had a CRR for as long as I can remember and I don’t think honestly (there is) an issue to be made here... You should look at it as part of monetary policy that it is exercised and part of it is liquidity policy for the banks.”

Although the financial system withstood the global storm in 2008 and many highlighted that Indian banks were not bailed out like the ones in the US, the position could not be seen reflecting the reality since many state-run banks were recapitalised many times in the past.

The RBI had set out to achieve 3% CRR as medium-term goal, but reversed midway to use it as a tool to fight liquidity and inflation.

It is also equipped with a legal provision not to pay interest rates, which many bankers call the biggest non-performing asset.

More than Rs 2.5 lakh crore is with RBI without interest, while banks pay an estimated Rs 20,000-crore interest.

When banks compete with mutual funds and deposit-taking finance companies, it may be time to consider Chaudhuri’s arguments.

Few could deny that regulations and tax policies over the years have turned against banks, while favouring new avenues of financial intermediation, which individual investors are yet to embrace.

Also, the mandated investment for banks and insurance companies in government securities is resulting in financial repression. Government bonds ensure that there’s credit safety, but there is no market safety.

One may get Rs 108 for every Rs 100 deposited, but does the purchasing power remain the same, or is it enhanced. In times of high inflation, such as in the past two years, the depositor actually loses purchasing power.

It is also debatable whether the government would be able to borrow at around 8% if only its regulators had not mandated such high SLR for banks and compelled that half the insurance premium be invested in G-secs .

“While the appropriate quantum and mode of maintaining such buffers will be debated in the years to come, the time has come to limit requirements of statutory holdings of highquality securities or cash reserves to only prudential purposes, and not for the purposes of funding government debt or for attempting to conduct monetary policy,’’ said Rajan. Now that he is in the driver’s seat, is there a hope?