Banks are required to maintain Cash Reserve Ratio to the extent of 4.75 per cent of its deposit base for no interest compensation. This naturally causes considerable loss to the banks’ kitty. Therefore, Pratip Chaudhuri, Chairman, State Bank of India, made an appeal to abolish CRR or to compensate the loss by way of interest. The abolition of CRR may not be feasible as it has a direct bearing on solvency and inflation. However, if CRR is abolished, the bulk deposit of the banks could come down drastically and the return on assets ramp up considerably. Now is the time for rationalisation of the CRR concept.
CRR no tax on banks
Even as the Chairman of State Bank of India wants the the cash reserve ratio (CRR) phased out, the author has argued well the case for not paying interest on the reserves with the RBI in “Interest on CRR, a big mistake” (Business Line, August 24). The de-emphasising of the CRR after the introduction of financial reforms in the 1990s, under pressure from the IMF/WB, was mainly the result of propaganda by Western economists that it was tantamount to a tax on banks. CRR is not a tax, but a fee. The difference between a tax and a fee is that there is no direct measurable benefit or service from the former, unlike the latter. The banking system benefits from the licence it gets from the central bank to carry on business, because it mints money through the deposit multiplier. An initial injection of deposit money gets multiplied by the system through its operations contributing to its income. It is a form of seigniorage enjoyed by the banking system similar to what the government gets through printing currency notes.