No case to scrap CRR—ASSOCHAM

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No case to scrap CRR—ASSOCHAM
Apex Industry body ASSOCHAM has strongly advocated continuation of interest free cash reserve ratio (CRR) by RBI for a healthy and effective direct monetary and indirect liquidity management as well as provide a big cushion in difficult times, consequent to a debate that is taking place to undermine the efficacy of CRR in present times.

The Chamber obtained the views across section of stakeholders including industries, banks, regulators, practioners and economist.

While releasing the views, the chamber said a strong debate regarding the dilution or abolition of CRR has caught the attention of the banks, industry and the regulator alike.

CRR is a portion of the deposits that the commercial banks need to keep with the central bank and is currently pegged at 4.75% without interest from RBI.

"However, the views, those in favour of doing away with CRR argued that CRR should bear reasonable interest, say 7 % pa, and few advocates phasing it out as it has lost its validity and perhaps a cost to the economy. In these hard times when the cost of lending continues to dampen investments and inflation eating into the real income of the depositors, continuation of CRR interest free with RBI, is a huge cost to be additionally borne by the industry", they said. 

Consequent to the amendment in July, 2006, RBI decided not to pay any interest on CRR as the whole purpose to manage liquidity in the system would face fireball. It was also for an increased level of confidence among the depositors. It enhances RBI's operational flexibility and greater maneuverability in monetary management. Therefore there is no case to scrap CRR or provide any interest thereon.

However, the opposite camp advocates that  CRR drains out substantial funds out of the banking system which is a cost to be borne by the borrowers.  It is being treated as an idle asset. While there are several others financial intermediateries like NBFCs, Insurance, Pension funds etc which are not subject to CRR and hence have an advantage.  The following table will illustrate the point:

Total Deposits in all Scheduled Commercial banks 65 lakh crores
CRR: 4.75% of above to be kept with RBI 65 lakh crores x 4.75%=around 3 Lakh crores
Expected Interest earned on CRR deposits made with RBI 3 lakh crores x 0% = Rs.0
Estimated Interest loss for an year at 7% p.a Rs 21,000 Crores P.A.

However, the majority view to ASSOCHAM was that in light of the existing global environment, a strong and healthy monetary policy mechanism is a prerequisite to afford financial stability and quick response to any distortion. The case for continuation of CRR interest free is very valid as well as indispensable. It has worked well and perhaps is not an issue that needs any revisit, adds the chamber.

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