Calculate CRR on deposits, not on accrued interest: SBI

The debate over cash reserve ratio (CRR) is not over just yet. SBI Chairman Pratip Chaudhuri has added another dimension to the debate by saying that CRR should now be calculated only on the deposits and not the accrued interest on these deposits, reports CNBC-TV18’s Gopika Gopakumar.

Banks are making a new demand on the CRR front. Banks in general and SBI in particular have been demanding lower CRR first and then interest to be paid on cash reserves maintained with RBI as CRR. SBI has taken the debate one step forward. It believes that the Reserve Bank is over-calculating the CRR in terms of the principle amount.
Chaudhuri has stressed that RBI should allow banks to calculate CRR on the deposits that have been kept with the banks. Say for instance a depositor keeps Rs 1,000 of deposits with the bank. (Read the full interview here). The CRR currently is now being calculated on the accrued interest on these deposits. That is a huge amount of money for the bank. Pratip Chaudhuri’s argument is that the CRR should be calculated on the deposited amount which is Rs 1,000 kept with the bank.
"If you see the way the CRR is calculated, there are two kinds of deposits. One in which the depositor collects the interest periodically, maybe monthly and quarterly at the most preferred frequencies. Also there are people who keep it in what is called a reinvestment plan or a compounded fixed deposit. Now if somebody has a Rs 1,000 deposit and Rs 300 is the embedded interest, this person obviously is not drawing that interest. Therefore to our mind that is not cash into the economy, because the fear is that if you put too much cash in the economy that would go and increase the demand for goods and raise prices. So a CRR on accrued interest is a very huge component and it puts the banks at a great competitive disadvantage vis-à-vis the NBFCs," Chaudhuri argues.
He also had a discussion on this matter, but one needs to wait and see whether RBI will concede to this demand of his.
But clearly his argument being that the CRR calculated on the accrued interest is clearly causing a big disadvantage to the banks. That is being seen in terms of depositors’ demand being shifted to NBFCs, because they are obviously charging higher interest rate on their deposits.