Mumbai: Ahead of the mid-quarter review of monetary policy on Monday, the State Bank of India (SBI) has said if the apex bank cannot reduce CRR rate, which is a must for lending rate cuts by banks, they should pay interest on cash reserves that banks park with the monetary authority.
Incidentally, most analysts expect the RBI to hold rates during its mid-quarter monetary policy review.
"If a CRR cut cannot be done due to inflation worries, let the RBI pay us interest on CRR. We will then do the transmission for sure. If the RBI pays me Rs 500 crore on interest on my CRR, I promise to transmit the entire Rs 500 crore to borrowers by reducing my base rate," SBI chairman Pratip Chaudhuri said recently.
Last year he had triggered off a heated debate by calling for abolition of CRR. He felt that CRR is "dead money" and it had led to a public spat with K C Chakrabarty, the RBI deputy governor in charge of banking services, who said that if the SBI chairman is not comfortable working under existing regulations, he should look for "some other sector".
Explaining the rationale for SBI's as well as other banks' inability to cut lending rates with minor repo rate cuts that RBI has done by 125 basis points (1.25 percent) since the middle of the past fiscal, Chaudhuri said, "The relationship between the repurchase rate and the bank lending rate is rather weak. Bank deposits rates are guided by postal deposit rates and not by RBI rates".
Further, he said that a 25 basis points repurchase rate cut will give an additional income of merely Rs 50 crore to the SBI.
"How do I distribute it to my borrowers when my loan book is Rs 7 trillion? Instead, if the RBI reduces CRR by 25 basis points, I get about Rs 3,000 crore. So, if there is a CRR cut, then the transmission is more pronounced," the SBI chairman argued.
Defending banks for not aiding monetary transmission by reducing their base rates, Chaudhuri pointed out that when the RBI increased lending rates by 200 basis points in the past, banks did not increase lending rates in a similar manner.
He also pointed out that the biggest competition for banks when it comes to deposit raising comes from postal savings, which fetch a higher interest rate of 8.5 percent.
"Why should a person withdraw his money from postal savings and deposit in a bank that fetches lower returns?" he asked.
Since the middle of the last fiscal, the RBI reduced repo rates by 125 basis points and CRR by 50 basis points, but banks on an average have cut their base rate only by 30 basis points.
Stating that there are many other tools for the RBI to help banks monetary transmission, he said one way is to pay interest on CRR to banks, while another option is to get the minimum tenor of deposits to three days from the current seven days.
Increasing export credit refinance to 100 percent from the current 50 percent, which would help boost exports and in turn could help narrow the huge trade deficit, could also other options, he said.
He also said that the RBI and the government need to signal that they are serious in supporting exports.