Money in the bank

The cash reserve ratio's use to ensure monetary stability is being debated as lenders' deposit growth slows down, reports RAGHU MOHAN

- RAGHU MOHAN

Is the cash reserve ratio (CRR) a dead-weight on banks? Of every ₹100 raised by banks in deposits, ₹4.50 is locked up and it earns nothing by way of interest. The CRR framework is in the spotlight because one, a good number of folks now opt to park their monies in bourse-linked investments. In this financial year, ₹603,280 crore moved in to mutual funds (MFs) compared ₹354,701 crore in FY24; deposit growth in the same period (incremental) is at ₹846,980 crore (₹2,431,312 crore). And two, banks' credit-deposit (CD) ratio is in the high seventies because deposits are trailing credit.

So, is the CRR to be re-looked at?

Two senior bankers concur that there's a case to reverse the 50 basis points hike in the CRR given effect to during the pandemic; it would bring down the figure to 4 per cent (and take care of the CD ratio aspect). They are Dinesh Kumar Khara, who recently stepped down as State Bank of India's chairman, and S S Mundra, former deputy governor, the Reserve Bank of India (RBI). But beyond this, they will not put a gun to the CRR.

As Khara views it, "this (any tinkering with CRR) will not address the issue relating to the preference for stock market instruments for asset allocation. As for some holding the view that the CRR is making banking as a business unviable, well, that I think is an exaggeration." Mundra has it that people's interest in equities and other assets over deposits, "to my mind would only continue to gain momentum". That in any case, funds invested in the stock markets or in MFs ultimately remain within the banking system. "What distinguishes a winner bank is the superior ability to get and maintain settlement accounts. And thus, have the benefit of low-cost transition funds."

'Time-tested tool'