RBI should either do away with CRR or compensate the banks for the losses incurred as the banking system was not earning any interest on it, Chaudhuri said.
Kolkata: State Bank of India Chairman Pratip Chaudhuri Thursday made a strong pitch for the abolition of cash reserve ratio (CRR), saying that keeping required funds with the Reserve Bank without any interest was costing the banking system about Rs 21,000 crore.
RBI should either do away with CRR or compensate the banks for the losses incurred as the banking system was not earning any interest on it, Chaudhuri told reporters on the sidelines of Ficci Banking Conclave here.
"CRR does not help anybody and it is unfairly put on the banks. Why is CRR not applied to insurance and other companies who are mobilising deposits from the public?" he asked.
CRR, he said, should be phased out within a reasonable time-frame. "Phasing out of CRR would release scarce capital resources which will help the banks in reducing rates for the industry."
Banks are required to keep 4.75 percent of their deposits with RBI.
Chaudhuri said the other option was to increase the SLR, on lines of CRR percentage. Banks earn interest on SLR deposits.
About losses incurred by the banking system for keeping interest-free CRR deposits, Chaudhuri said it was around Rs 21,000 crore for the entire industry and Rs 3,500 crore for SBI.
Chaudhuri said SLR deposits were sufficient to address the issues of solvency and liquidity in case of a failure and maintaining an additional CRR was superfluous.
When pointed out that RBI was using the CRR instrument to tackle inflation, Chaudhuri said to some extent it was true.
"But present day inflation is not due to demand pressures, it is a result of inadequate supply in the system."
To a query, Chaudhuri said many other banks and the Finance Ministry had put forward this view to RBI. "RBI has to take a call on it."
Referring to SBI, he said the bank would attempt to reduce NPAs in the coming quarters.