- A. Chandramouliswaran
This refers to “Govt gets it wrong on CRR” (Business Line, November 8). The author has rightly pointed out that the government shouldn’t pressurise the RBI towards interest payment on CRR. Instead, the government, the RBI and banks should work towards reducing non-performing assets (NPAs) and other administrative charges, which constitute wastage. Reducing expenditure, wastage, is one way of earning profits. If the RBI takes interest on CRR, the ultimate financial burden is borne by the ordinary customers of banks. This is not a permanent solution. The process for lending of loans should be strengthened, while also being user-friendly. Automation of processes across banks, in public and private sector, will reduce corruption. Promoting greater awareness amongst bank customers, and the public at large, will enhance efficiency.
Vedula Krishna, Visakhapatnam (HBL)
This refers to ‘Govt gets it wrong on CRR’ (Business Line, November 8). The Reserve Bank of India acts as a bankers’ bank and ensures stability of the entire monetary system. All banks enjoy the benefit of credibility due to regulation enforced by the RBI. Hence, they must pay for it. One way to measure the benefit derived can be by way of deposits mobilised by them. Hence, it is quite logical that they must forego interest on CRR, which is based on their deposit figures.
S Kalyanasundaram, Chennai (HBL)
1 comment:
I thank Sarvashri Chandramouliswaran, Krishna and Kalyanasundaram for their comments. On the point raised by Shri Chandramouliswaran, earlier there was a statutory stipulation of a minimum and a maximum of 3 per cent and 15 per cent, respectively, of NDTL for CRR. It was abolished a few years ago. RBI was then paying interest on the ratio above 3 per cent and banks were happy with the arrangement as the rate was fairly satisfactory. But then it was found that the amount of interest paid at one time was such that it was equivalent to diluting the CRR by nearly 2 percentage points. (I am quoting from memory). So it was thought better to have a lower CRR without interest payment. But since deposit accretion is widely different among banks the increase in CRR on the entire NDTL creates difficulties for small banks. Hence the RBI experimented with the idea of an incremental CRR, i.e., higher CRR only on the additions to deposits. It was a good idea and I do not know why it was given up at some point of time. The whole problem is that banks would like to earn income in easy ways rather than take the difficult route of improving efficiency. ATMs have helped banks greatly in cutting down transactions at the counter. It should have led to operational efficiency resulting in lower service charges and lending rates. But it has not happened. RBI has had to issue directives on such matters as fees for electronic fund transfers. On forex transfer by wire the banks in USA charge a flat $20, whether it is $100 or $1 million since the work involved is the same in either case. Our banks charge a percentage on the value that could be high in absolute terms on large transactions. My recollection is that whenever the RBI raised CRR in the past banks were prompt in reducing deposit rates but they were not forthcoming equally by raising rates whenever it was reduced. There is no strong lobby for depositors unlike in the case of borrowers although in numbers the former should be many times more than the latter. In general deposit rates are now negative in real terms ex post. The repo counter at the RBI has become a refinancing window for banks with surplus SLR securities as they can roll it over continuously. There is also the arbitrage opportunity in the call money market. Under the circumstances there is not much incentive for the big banks to engage in deposit mobilisation.
A. Seshan
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