Letters: CRR conundrums

This refers to the article “Guide, guidance and remote control” by Rajeev Malik (September 13) and his statement that a significant change in the Reserve Bank of India’s (RBI’s) stance seems less likely. But it has been reported that the RBI is likely to do away with the variable cash reserve ratio (CRR: minimum and maximum three and 20 per cent respectively of the Net Demand and Time Liabilities or NDTL), which has stood at six per cent since May 2011.

Banks are, however, exempted from maintaining average CRR on liabilities to the banking system. In other words, for the purpose of working out liabilities to be subjected to CRR at the rate prescribed, if net inter-bank liabilities are positive, they should be deducted from total NDTL, and for the purpose of working out the statutory minimum CRR of three per cent on total NDTL net inter-bank liabilities should be included. The exemption allows banks to borrow from each other just to meet the variable portion of CRR requirement. Its efficacy has been, therefore, questioned, in certain quarters because its unintended beneficiaries, at the cost of our banking system, are brokers who pocket the commission by liaising between the banks (those with excess CRR – mainly bigger banks – and those facing a shortage, which are generally smaller). Our wizards in the banking field may want to ponder this question.

K Mundanad, Navi Mumbai