Cash-deposit ratio of banks still too high

The cash-deposit ratio of scheduled commercial banks in India (cash in hand and balances with the RBI as percentage of deposits) is observed to be high at 8.2 per cent as at end-March 2011.

The ratio ranges between 6.9 per cent (old private sector banks) and 9.2 per cent (new generation private sector banks). This includes the Cash Reserve Ratio of 6 per cent statutorily required to be maintained with the Reserve Bank, which has since been brought down to 5.5 per cent in the recent Credit Policy review held in January.

The need for such a high C-D ratio in these days when plastic cards, Internet payments, electronic funds transfer, and so on, are on the increase is surprising and needs to be viewed in the context of efficiency and profitability of banks.

In fact, the ratio, which remained at 7.1 per cent in March 2002, has gone up to 8.2 per cent in March 2011.

Cash preference

Since the culture of ATMs has been spreading fast, no doubt the banks need to maintain hard cash to meet the demands of customers. There were 74,505 ATMs functioning all over the country as at end-March 2011. The public preference for hard cash continues to be strong indicating, perhaps, the lack of spread of banking habit in its fullest sense, the persistence of corruption, prevalence of black money, high level of inflation and general insistence for cash payments for commodities such as gold and silver in particular.

The high level of cash transactions in the economy necessitates more physical notes in circulation adding responsibilities to the Reserve Bank and increasing the seigniorage cost.

This has been well evidenced in the increase in bank notes in circulation by 18.7 per cent, that is, from Rs.7, 88,299 crore in March 2010 to Rs 9,35,856 crore in March 2011.

Banks have been provided with currency chests to improve their cash management.

The Reserve Bank through its 18 issue offices, one sub-office and a wide network of 4,248 currency chests carries out the issue of notes and management of currency and helps the banking system improve its funds management.

With the implementation of prudential norms, as per the Narasimham Committee's recommendations and also the Basel I and Basel II guidelines for improving banks' efficiency, the attention paid in the maintenance of cash and the cost it adds to banks' overall cost of funds seems to be somewhat missing, affecting, among other things, the profitability of banks.

Among all the bank groups, the old private sector banks maintain the best cash-deposit ratio (at 6.9 per cent) and their cost of borrowings is comparatively the lowest (at 2.2 per cent) as on March 2011.

The payment and settlement system has been strengthened over a period to facilitate smooth functioning of financial markets. Both paper-based and electronic payments systems have developed well to ensure fast, efficient and well-secured payment and settlements not only to obviate the need for physical movement of cash but also to bring in efficient funds management among banks.

Process streamlined

The Reserve Bank has streamlined the process flow in credit-push systems such as the National Electronic Funds Transfer, Real Time Gross Settlement, Electronic Credit System (credit) and National Electronic Clearing Service systems, and banks are in a position to credit beneficiaries account without any hassles.

With all these facilities, the cash held at banks has been found to be very high.

The cost of funds (at 4.7 per cent) and the cost of borrowings (observed at 2.3 per cent) for all scheduled commercial banks as at end March 2011 can be further brought down by minimising cash balances and related costs.

There is ample scope to reduce the physical handling of cash at branches and banks can save all related expenditures.

The cash and bank balances have to be considerably brought down taking advantage of the improved telecommunication system and facilities provided by the Reserve Bank.

Policy changes

The asset-liability management of the banks will also improve in the process. The Government and the Reserve Bank can also bring in policy changes by insisting on payments beyond a cut-off point, say, Rs 5,000 by means of instruments such as cheque or plastic cards or through electronic-payment systems.

Payments of cash to organised and unorganised sector where ever possible and feasible should be made only through banks and banking instruments.

This will help reduce the cost and other administrative hassles faced by the Reserve Bank in the issue of currency notes.

Less cash in circulation is also an indicator of economic development, in general, and banking development, in particular, is a fact which cannot be underestimated by policymakers. Such an approach will also facilitate strengthening financial and banking inclusion.

(The author is a Mumbai-based consultant. The views are personal.)

COMMENT NOW