Lenders ask central bank for interest on cash reserve ratio

In a marked departure from the usual vociferous demand for a policy rate cut and a lower cash reserve ratio (CRR), the country’s top bankers shied away from making such demands, given the comfortable overall liquidity and their own inability to pass on any rate cut by the Reserve Bank of India to borrowers.

In their customary pre-policy meeting with the central bank brass, the bankers discussed the state of the banking system and the relief that the RBI can be expected to give banks to improve their profitability.

Bankers said they had asked the RBI to give them interest on cash reserve ratios held by it. CRR is the slice of deposits banks must mandatorily park with the RBI; the current CRR rate is 4 per cent. CRR does not earn any interest for the banks.

Sluggish growth

Last year, the CRR was a point of hot debate in banking circles, with State Bank of India Chairman Pratip Chaudhuri saying mandating such a ratio is “anathema” to the system and must be abolished.

On why the bankers did not ask for a CRR cut and/or a repo rate cut, Punjab National Bank Chairman K.R. Kamath said: “Unless the deposit rate comes down, we may not be in a position to transmit whatever cut the RBI is announcing.”

There is no possibility of the cost being brought down because deposit growth is sluggish, said Kamath, who is also the Chairman of the Indian Banks’ Association.

“Bankers themselves believe that liquidity is really comfortable, so the case for a CRR cut does not really exist. Any cut in the CRR will just add to the banks’ profitability,” said Diwakar Gupta, Chief Financial Officer, State Bank of India.

REVISIT PROVISIONING

In the face of slowdown in the economy and rising demand from corporate borrowers to re-structure their loans, bankers requested the RBI to re-visit the provisioning requirements on restructured accounts.

The RBI increased the provision on restructured standard accounts to 2.75 per cent from 2 per cent in November to recognise the inherent risks in restructured standard assets. Further, the provisioning has been increased to 5 per cent in respect of new restructured accounts with effect from June 1, 2013.

In the case of the existing stock of restructured standard accounts (as on March-end 2013) the provisioning will be increased in a phased manner: 3.50 per cent with effect from March 31, 2014; 4.25 per cent with effect from March 31, 2015; and 5 per cent from March 31, 2016.

satyanarayan.iyer@thehindu.co.in

beena.parmar@thehindu.co.in

Source: thehindubusinessline