Bankers want 6 per cent CRR to stay

Bankers have urged the Reserve Bank not to raise the cash reserve ratio (CRR), currently at 6 per cent, in the forthcoming policy. CRR is the portion of deposits which have to be maintained with the central bank interest free by the banks as part of prudential guidelines.

CEOs of select private and PSU banks suggested this to RBI governor D Subbarao and deputy governors during their meeting yesterday held for pre-policy consultation. The credit policy is slated for announcement on 27 July.

However, according to an unnamed source quoted in a reported in the Economic Times, the CEO of a very large bank held a contrarian view and suggested that the RBI consider a CRR hike. According to the banker, liquidity which is now tight is expected to ease in less than a month and banks would soon be flush with money and no investment options.

The bank chief was in a minority while the majority was firmly opposed to any hike in CRR as they expect bank margins to come under further pressure with a CRR hike. Bank margins are the difference between the cost of funds and yield on advances, Bank margins have already reduced marginally in the first quarter following RBI's directive to pay interest on daily balances.

In the same context, RBI questioned banks on the slowdown in deposit growth to which the banks responded that this was largely due to reduction in deposit rates by banks. According to a Motilal Oswal report deposits growth had moderated 22 per cent in June 2009 to 13.9 per cent in quarter ending June 2010.

According to the report, deposit growth was down from 22 per cent in the quarter ending June 2009 to 19.8 per cent in September 2009, to 17.6 per cent in December 2009, to 17.1 per cent in March 2010 and 13.9 per cent in June 2010.