Business Standard

SBI chief engages the central bank

Business Standard  |  New Delhi 

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(SBI) Chairman has publicly joined issue with the banking regulator, the Reserve Bank of India (RBI). Mr Chaudhuri questioned the central bank’s practice of levying a cash reserve ratio, or CRR, by which a portion of bank deposits is impounded by the central bank, thus making credit both dearer and more scarce. This is akin to a schoolboy arguing with the headmaster. While bank chiefs routinely fall in line with what comes out of the RBI, the fact that the SBI chief is akin to the school head boy explains why perhaps only he could dare to go public. Banks, particularly the public sector ones, are looking for every bit of regulatory leeway they can get to make their performance look better. Mr Chaudhuri has said his aim is to raise a debate on an issue over which other bank chiefs hold similar views.

is a time-honoured instrument in the hands of a central bank to administer and calibrate monetary policy. The reason why Mr Chaudhuri may have felt emboldened to go public is that a distinction can be drawn between and managing liquidity. Formulating as well as implementing monetary policy to create a conducive and stable environment for growth and development is the primary mandate of a central bank in a developing economy. In mature economies, which are already developed, the overriding aim of monetary policy is seen to be to manage inflation. On the other hand, liquidity management is a much smaller issue. It involves ensuring that the functioning of the economy does not suffer from either too much or too little liquidity. If there is too much of it, the banking system will be awash with funds, which could stoke inflation. If there is too little of it, they will have to pay sky-high overnight rates for funds to meet regulatory ratios.

If you take the view that CRR is an instrument to regulate liquidity by impounding more or less of banking deposits, and changes in it should not be seen as signals for changes in the central bank’s monetary stance, then the importance of CRR as a tool of overarching monetary policy goes down. If that be so then banks can argue that liquidity can be managed through the central banks’ open market operations, and the impounding of deposits through CRR can be done away with. Most recently, the has lowered CRR to ease liquidity without seeking to signal an easing of monetary policy. For banks, CRR hurts: they earn nothing off it, turning the item on their balance sheets into, effectively, a non-performing asset (NPA). At a time when real-world NPAs are assuming serious proportions, banks will cry for help. The RBI, on the other hand, can hold that CRR is an essential monetary policy tool and banks have to live with it. A debate on the efficacy of individual monetary policy tools should be welcome.

Debating cash reserve ratio

SBI chief engages the central bank

State Bank of India (SBI) Chairman Pratip Chaudhuri has publicly joined issue with the banking regulator, the Reserve Bank of India (RBI). Mr Chaudhuri questioned the central bank’s practice of levying a cash reserve ratio, or CRR, by which a portion of bank deposits is impounded by the central bank, thus making credit both dearer and more scarce. This is akin to a schoolboy arguing with the headmaster. While bank chiefs routinely fall in line with what comes out of the RBI, the fact that the SBI chief is akin to the school head boy explains why perhaps only he could dare to go public. Banks, particularly the public sector ones, are looking for every bit of regulatory leeway they can get to make their performance look better. Mr Chaudhuri has said his aim is to raise a debate on an issue over which other bank chiefs hold similar views.

(SBI) Chairman has publicly joined issue with the banking regulator, the Reserve Bank of India (RBI). Mr Chaudhuri questioned the central bank’s practice of levying a cash reserve ratio, or CRR, by which a portion of bank deposits is impounded by the central bank, thus making credit both dearer and more scarce. This is akin to a schoolboy arguing with the headmaster. While bank chiefs routinely fall in line with what comes out of the RBI, the fact that the SBI chief is akin to the school head boy explains why perhaps only he could dare to go public. Banks, particularly the public sector ones, are looking for every bit of regulatory leeway they can get to make their performance look better. Mr Chaudhuri has said his aim is to raise a debate on an issue over which other bank chiefs hold similar views.

is a time-honoured instrument in the hands of a central bank to administer and calibrate monetary policy. The reason why Mr Chaudhuri may have felt emboldened to go public is that a distinction can be drawn between and managing liquidity. Formulating as well as implementing monetary policy to create a conducive and stable environment for growth and development is the primary mandate of a central bank in a developing economy. In mature economies, which are already developed, the overriding aim of monetary policy is seen to be to manage inflation. On the other hand, liquidity management is a much smaller issue. It involves ensuring that the functioning of the economy does not suffer from either too much or too little liquidity. If there is too much of it, the banking system will be awash with funds, which could stoke inflation. If there is too little of it, they will have to pay sky-high overnight rates for funds to meet regulatory ratios.

If you take the view that CRR is an instrument to regulate liquidity by impounding more or less of banking deposits, and changes in it should not be seen as signals for changes in the central bank’s monetary stance, then the importance of CRR as a tool of overarching monetary policy goes down. If that be so then banks can argue that liquidity can be managed through the central banks’ open market operations, and the impounding of deposits through CRR can be done away with. Most recently, the has lowered CRR to ease liquidity without seeking to signal an easing of monetary policy. For banks, CRR hurts: they earn nothing off it, turning the item on their balance sheets into, effectively, a non-performing asset (NPA). At a time when real-world NPAs are assuming serious proportions, banks will cry for help. The RBI, on the other hand, can hold that CRR is an essential monetary policy tool and banks have to live with it. A debate on the efficacy of individual monetary policy tools should be welcome.

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