Bank chiefs may ask RBI to pay interest on CRR

Chiefs of large commercial banks have decided to make a case to the Reserve Bank of India (RBI) for interest payment on the cash reserve ratio (CRR). Unlike in the past, the central bank does not pay any interest on the CRR, the slice of deposits that banks have to park with RBI. Bank chiefs met on Friday under the aegis of the Indian Banks’ Association, a body which represents the interests of the banking industry. They have decided to take up the issue of non-payment of interest with the central bank. The CRR is now 7.5%. For State Bank of India, the country’s largest bank in terms of assets and market share, with deposits (net time and demand liability) of Rs 5 lakh crore, a 7.5% CRR works out to Rs 37,500 crore which will not attract any interest. If the bank were to deploy this money at 4% on an annualised basis, it would earn Rs 1,500 crore. Bankers fear their margins will be hit as another rate hike may not be far off if the fund inflows continue. Already, in the first half of this fiscal, several banks have seen a squeeze in their net interest margins. Bankers feel there is nothing that prohibits the central bank from paying interest on CRR. Current pricing of deposits doesn’t factor in future rate hike. Banks want to rein in recovery agents to avoid RBI action.