The Hindu Business Line : Banks see case for CRR cut as liquidity is tight

Bangalore, Feb. 25 With liquidity remaining tight, some banks have approached the Reserve Bank of India (RBI) for reduction in the Cash Reserve Ratio.

The CRR - the balance banks are expected to maintain with the RBI against their net demand and time liabilities - is currently at 7.5 per cent. A public sector bank Chairman and Managing Director said that if lending rates were to be dropped, the CRR would have to be brought down. He said, “There are not many alternatives.”

Several banks during the last few days cut their prime lending rates by as much as 50 basis points. The rate reductions, however, have had little impact in stimulating credit demand so far, the banker said. Instead, “The banks’ bottom lines are now under pressure,” he said.

Logic no longer valid

The bankers said that the underlying logic of sterilising capital flows no longer existed. The CRR hikes effected by the RBI were primarily to soak up liquidity created by large inward non-debt capital flows, particularly investments from foreign institutional investors. Inward FII flows have since decelerated, considerably since the end of last year, coinciding with a full-blown sub-prime debt explosion in the U S.

Since the beginning of this January this year, net FII equity inflows was a negative $2.97 billion, according to data from the capital markets regulator, Securities Exchange Board of India. Besides, domestic corporates have halted cross-border borrowings, after the RBI clampdown on External Commercial Borrowings (ECB) last year.

The FII outflows and the foreign exchange purchases by public sector refineries had squeezed liquidity as a result, they said.

Currently CRR balances earn zero interest for the banks. The costs of maintaining the reserves were loaded on to lending rates, the bankers said. Accordingly the reduction would increase the liquidity available to the banks and help bring down the rates.

Scramble for deposits

In fact, the current tight liquidity situation had triggered a scramble for bulk deposits.

Bankers had initially hoped to cap maturing bulk deposit rates at 9 per cent and reduce lending costs. However, the current liquidity situation had resulted in a war for bulk deposits.

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