oppn parties CRR, RBI and Demonetization

News Snippets

  • MS Dhoni decides to take a two-month break, will skip West Indies tour but will not retire
  • Phagu Chauhan is the new Governor of Bihar while Ramesh Bais has been appointed as that of Tripura
  • Governors: Anandiben Patel shifted from Madhya Pradesh to Uttar Pradesh and Lalji Tandon from Bihar to Madhya Pradesh
  • Naga talks interlocutor RN Ravi appointed as Governor of Nagaland
  • Noted lawyer Jagdeep Dhankhar appointed as new Governor of West Bengal
  • 84 NDRF teams have been despatched to 23 states to tackle the flood situation
  • Three persons lynched in Bihar after being accused of cattle theft
  • Delhi police seize a consignment of 1500 kgs of heroin and busts a cartel of Afghanistan-Pakistan narcotics dealers with links to the Taliban
  • Supreme Court gives 9 more months to complete the Babri Masjid demolition case trial
  • Priyanka Gandhi not allowed to meet the families of the dead in the Sonabhadra firing, arrested
  • ICC inducts Sachin Tendulkar in [email protected]@@s Hall of Fame
  • Stock markets bleed for the second day. Sensex crashes 560 points
  • S Jaishankar, Minister of External Affairs, says Pakistan should release and repatriate Kulbhushan Jadhav immediately
  • Karnataka Governor Vajubhai Vala asks the Speaker to hold the trust vote latest by 1.30 pm today
  • The Government sends a list of 24 questions to mobile app company that runs video app TikTok seeking answers for anti-national and obscene content carried on the platform
Former Delhi CM and senior Congress leader Sheila Dikshit dies following a cardiac arrest. She was 81
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CRR, RBI and Demonetization

By Ashwini Agarwal

The RBI has instructed all banks to keep 100 percent of the cash deposits they have received since September 16 till November 11 in Cash Reserve Ratio (CRR) with it. Now CRR is a non-interest bearing deposit which the banks maintain with the apex bank. Banks, on the other hand, are paying 4 to 6 percent interest to savings bank depositors. Hence, banks will be losing out to that extent.

CRR is an instrument of setting liquidity in the financial market. The RBI uses it alternately to either flush out, or pump in, money in the banking system. Since banks can lend on the back of funds available with them, the RBI, by tweaking the CRR norms, decides how much they can lend. Normally, this figure remains between 4 to 7%. It is currently at 4%. But since there has been a spurt in bank deposits post demonetization and excess liquidity in the banking system can lead to inflationary pressures, the RBI has taken this surprisingly extreme step.

Two things need to be stated here. Since demonetization, limits have been set for people to withdraw their own money from their bank accounts. One can only withdraw a cumulative Rs 25000 from savings and Rs 50000 from current accounts in a week (and the week here means clear 7 days and not Saturday of the preceding week and Monday of the following). If withdrawal limits are in place, even if banks lend money to people, how are they going to use it? The only way it can be used is if loans are taken for white goods, automobiles or homes and the like, where cheque payments are accepted. So is the government trying to stifle that market? Common sense would permit vigorous lending by banks in these depressed times for business. That would improve business sentiment considerably.

Secondly, this is the right time for the banks to earn some money. Since they are flush with funds, they can lend in sectors that are less risky, for instance home and automobile or to borrowers with good ratings in business and industry. There are reports of property prices crashing. If people can get bargain deals for properties and banks lend them money, a lot of deals can now be struck. This will liquidate part of the huge unsold inventory in the real estate sector and will have immediate effect on all sectors related to it.

Hence, the RBI decision is baffling, to say the least. It could have raised the ratio to 6 or even 10 percent to flush out some cash, but a 100% CRR is regressive. Add to it the additional burden on banks of paying interest on savings bank deposits without getting any from the RBI and the trouble for banks is multiplied. Although the RBI has clarified that it is just a temporary measure, having worked long hours to implement demonetization – with employees facing stress and much more – bankers would not be happy with such a restrictive fiat from the apex bank.