should crr be done away with

7/31/2019 Should CRR Be Done Away With

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SHOULD CRRBE DONE AWAY WITH?

Subject : Banking & Insurance


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Cash Reserve Ratio

The Cash Reserve Ratio (CRR) refers to this liquid cashthat banks have to maintain with the Reserve Bank ofIndia (RBI) as a certain percentage of their Net Demandand Time Liabilities (NDTL) .

For example if the CRR is 10% then a bank with NDTLof Rs 1,00,000 will have to deposit Rs 10,000 with theRBI as liquid cash.

This minimum ratio (that is the part of the totaldeposits to be held as cash) is stipulated by the RBI andis known as the CRR or Cash Reserve Ratio.


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Cash Reserve Ratio

Banks in India are required to hold a certain proportionof their deposits in the form of cash.

However, actually Banks dont hold these as cash withthemselves, but deposit such case with Reserve Bank ofIndia (RBI).


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Cash Reserve Ratio

Thus, When a banks deposits increase by Rs 100, and ifthe cash reserve ratio is 5%, the banks will have to holdadditional Rs 5 with RBI and Bank will be able to useonly Rs 95 for investments and lending / credit purpose.

Therefore, higher the CRR, the lower is the amountthat banks will be able to use for lending and investment& vice-versa.


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Cash Reserve Ratio

When the CRR is increased,

the amount of funds that a bank can lend decreases.

Banks then try to encourage more deposits by increasingthe interest rates.

Rising interest rate usually discourage loan seekers as a

higher interest rate means that the cost of money hasincreased.


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RBI (Amendment) Bill, 2006

The Reserve Bank of India (Amendment) Bill, 2006 hasbeen enacted. Consequent upon amendment to sub-Section 42(1),

The Reserve Bank, having regard to the needs of securingthe monetary stability in the country, can prescribe CRRfor scheduled banks without any floor rate or ceiling rate.

Before the enactment of this amendment, the ReserveBank could prescribe CRR for scheduled banks between3 per cent and 20 per cent of total of their demand andtime liabilities


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No Interest Payment

In view of the amendment carried out to RBI

Act 1934, omitting sub-section (1B) ofSection 42,

The Reserve Bank does not pay any intereston the CRR balances maintained by SCBs

RBI stopped paying interest to banks on theirCRR deposits in 2007.


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Objectives of CRR

Ensures Safety and Liquidity of Deposits.

Preventing banks from going into insolvency.

Tool for Controlling Liquidity

o To drain excess liquidity

o To release funds needed for the economy


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CRR Rates (1935-2012)

0

2

4

6

8

10

12

14

16CRR


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Maintenance of CRR

For the purpose of maintaining CRR, everyscheduled bank is required to maintain aPrincipal Account with the Deposit Accounts

Department (DAD) of the Reserve Bank atthe centre where the principal office of thebank is located.


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Reporting Requirements

All SCBs are required to submit to ReserveBank a provisional Return in Form 'A' within7 days from the expiry of the relevant

fortnight

The final Form 'A' return is required to be

submitted to RBI within 20 days from expiryof the relevant fortnight.


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Calculation of CRR

The prescribed CRR during a fortnight has tobe maintained by every bank based on itsNDTL as on the last Friday of the second

preceding fortnight.

In order to improve cash management by

banks, as a measure of simplification, a lag ofone fortnight in the maintenance ofstipulated CRR by banks has beenintroduced


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Maintenance of CRR on Daily Basis

With a view to providing flexibility to banksin choosing an optimum strategy of holdingreserves depending upon their intra fortnight

cash flows,

All SCBs are required to maintain minimum

CRR balances up to 70 per cent of the averagedaily required reserves


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Credit Expansion


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Should CRR be abolished?


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Should CRR be abolished?

Pratip Chaudhuri (SBI - Chairman)

argued that

CRR should be completely abolished


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SBI Chairman & CRR

"Why is CRR not applied to insurance and othercompanies who are mobilizing deposits from the public?

The pinch of high lending rates which the customers arefacing is the result of CRR.

It would allow banks to lower lending rates. If the RBI

can't do away with it, it should at least pay some intereston CRR since banks pay their depositors, he had said.

CRR acts as a tax on the banking system.


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SBI Chairman & CRR

CRR was meant for preventing banks from going intoinsolvency.

o Since banks already have to deposit 23 per cent oftheir money in government bonds as StatutoryLiquidity Ratio (SLR), there is no point of havingCRR.

CRR is an NPA (non-performing asset) for banks.


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SBI Chairman & CRR

Total Deposits in all Scheduled Commercial

banks65 lakh crores

CRR: 4.75% of above to be kept with RBI65 lakh crores x 4.75%=around 3 Lakh

crores

Expected Interest earned on CRR deposits

made with RBI3 lakh crores x 0% = Rs.0

Estimated Interest loss for an year at 7% p.a Rs 21,000 Crores P.A.

CRR costs banks a loss of approximately Rs. 21,000 crore, out of

which Rs. 3,500 crore to SBI alone, due to lack of interest

received per year (No interest payment)


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EAC - Chairman & CRR

C Rangarajan

Chairman - Prime Minister's Economic AdvisoryCouncil (EAC)


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EAC - Chairman & CRR

"We need to move towards a situation inwhich the level of CRR comes down and it isused as an instrument of credit control only

in extraordinary circumstances,"

"As OMO (open market operations) becomes

increasingly a major instrument of creditcontrol, the role of CRR as an instrument ofcredit control will come down,".


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Deputy Governor - RBI & CRR

KC Chakrabarty

(RBI - Deputy Governor)


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Governor - RBI & CRR

D. Subbarao (RBI - Governor)

central bank has set up a committee to reviewthe need to retain the much-debated CRR

(Pratip Chaudhuri & K.C. Chakrabarty)
http://blogs.reuters.com/india/files/2012/09/subbaraosmile21.jpg


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Why Abolish CRR

Why only Banks

No Interest payment

Acts as a tax burden

NPA for Banks

Loss of apprx. Rs. 21000

SLR (insolvency)

OMO (Credit Control)


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US came up with the concept of cash reserve as early as1863.

cannot ignore or doubt the credibility of CRR

one of the major tool for RBI

gives banks liquidity cushion.

protects the interest of depositors

frequent cases of bankruptcy of private banks &co-operative banks in India

CRR should not be Abolished


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CRR is very effective because it directly takes out orinduces liquidity into the system

OMO may be good for supplying liquidity, but may beineffective for drawing it out as banks can choose not tobuy paper from RBI which is offered to them.

However, CRR is compulsory to all Banks.

In fact, CRR is even more powerful than the repo rate

CRR should not be Abolished


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should crr be done away with

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