The Chairman of India's largest bank, State Bank of India, Mr. Pratip Chaudhuri, has put forward his view regarding cash reserve ratio (CRR). In his view CRR should be phased out since it increases the cost of funds for the banking industry. Cash reserve ratio refers to that portion of deposits which the banks have to keep with the reserve bank. No interest is provided on these funds. At present, funds kept as CRR accounts for 4.5 percent of the total bank deposits.
SBI chairman further clarified his view saying that although it was strongly relevant at one point, it may have lost its relevance now. He said, "If 4.75 per cent doesn't earn any income, then my balance resources will have to earn for the rest (to make up for the loss of interest on CRR) which is leading to a cost increase for the industry without benefiting anybody."
He went on to add, "It is not my case that CRR be abolished entirely tomorrow. However, it does need to be phased out within a reasonable time-frame as impounding of this large quantum of lendable resources in a capital-scarce economy with vast requirement for infrastructure, does not stand to reason."
According to Mr. Chaudhuri, statutory liquidity ratio (SLR) is sufficient to solve the issues of liquidity and solvency.