Existing laws don’t allow interest on CRR: Chakrabarty

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RBI Deputy Governor K.C. Chakrabarty
RBI Deputy Governor K.C. Chakrabarty

The Reserve Bank can pay interest to banks on their cash reserve (CRR) deposits if the laws are changed, senior-most Deputy Governor Kamalesh Chandra Chakrabarty has said.

“Under the present law, I can’t pay interest on the CRR...that modification came four-five years back...The government should change the rule (for payment of interest on CRR),” Chakrabarty told PTI in an interaction at his office.

“If the CRR is a cost on banks, then they can adjust that somewhere else,” he added.

Explaining the rationale behind the regulatory mandate, the Deputy Governor, who looks after banking supervision, apart from a host of other departments at the central bank, said the CRR is charged on banks because only they can create money.

“Who creates money?...It’s only bank deposits that too chequeable deposits or demand deposits that create money.

That’s why CRR is imposed only on banks...if a bank gives money to NBFCs, it will go not to NBFC but to some bank accounts (of NBFCs),” Chakrabarty, who recently got a two-year extension, said.

Non-banking finance companies, insurance companies or any other financial institution can’t be equated with the banks with regard to CRR as they don’t create money, he said.

The CRR is the portion of deposits that banks have to keep with the RBI for which they don’t earn any interest. CRR stands at 4.25 per cent currently, while the policy rate or repo (rate at which the RBI lends to banks) stands at 8 per cent.

Most of the profits that the RBI accrues (last year it paid Rs 16,000 crore to the government as dividend alone) come from the CRR, and there have been media reports in the recent past that North Block favours the idea of paying banks interest on the CRR.

The RBI used to pay interest on CRR in the past, but a few years back the government had changed the rules in this regard and since then it was stopped.

(This article was published on December 10, 2012)
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It is unfair that decision to pay interest on CRR even though legitimate, being abnormally delayed,amounts to justice delayed is justice denied.

When Banks are paying interest to their customers on deposits, & if portion of same deposit is being retained by RBI, Banks must receive interest.

When RBI lends money to Bank, RBI charges interest to Banks, so RBI collects interest from Banks on their own investment /deposits

There is wide spread apprehensions that Banks do not offer better rate of interest on deposits, even though inflation rate is high, Banks earn huge profit on law cost deposits, in such scenario if RBI stars paying interest on CRR , Banks may raise interest rate on deposits,reduce various service charges

Looking at high inflation rate, RBI is unwilling to announce rate cut, however RBI/ Banks ignores interest of billions of depositors on subject of high inflation Even insurance on deposit is not being revised since 1993

Posted on: Dec 10, 2012 at 17:25 IST
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