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SBI Chairman's  Desire  to  Abolish  CRR  is  Myopic 

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Rajesh Goyal 



Today morning (24/08/2012), when I picked up the newspaper and saw a heading "Abolish CRR, says SBI Chief",  I could not resist and decided to write my views on this topic.  With my over a decade of experience in Treasury and Risk Management Divisions of the largest PS Banks (next only to SBI), I was wondering as to the rationale of issuing such a statement by SBI Chief.  Mr. Pratip Chaudhuri is undoubtedly  tallest figure among the commercial banks in India.  Undoubtedly it is a radical call.   Normally, I would have been happy by such a radical call as frequently I am also dubbed as a radical man for my views on number of issues. 


As I have started writing this article, I have received email from Mr Danendra Jain, a regular contributor to this website.  He rightly says "CRR and SLR are two Safety Valves built in the system by prudent bankers to protect banks from all types of adversities. Safety Valve in pressure cooker provide safety to cook when he or she forgets taking due care before cooking through pressure cooker. It is but natural that due to natural calamities or due to adverse business environment or due to global reasons banks have to face huge cash demand from depositors and liquidity crunch from time to time.  If CRR and SLR is abolished or reduced from present level, these banks will go fail and depositors will face the consequences arising out of faulty credit decisions of bank officials".

Thus, Mr Chaudhuri, instead of meeting the challenges to keep up the profits, wants an easier way out that is abolishing CRR so that his bank can earn some more profit.  It appears he is not able to see beyond his balance sheet.  The paramount interest is the safety of the funds of the customers.   He should be well aware that lakhs of depositors prefer to keep their deposit with SBI and PNB instead of ICICI bank or other big private banks, only because they feel safe as they have perception that they have safety nets in place.  


Now let us analyse the impact of a move of abolishing CRR.  The present CRR is as low as 4.75% (I am a witness to CRR being as high as 15% in 1994).  Thus even if CRR is abolished and bank is able to deploy the whole amount in standard assets, the impact will be only marginal and NII will increase by few basis point.   Mr Chaudhuri needs to have a deeper look at the balance sheet of SBI, and he will find many leakages in the revenue.  A cursory glance at the Balance Sheet of SBI for FY 2011 and 2012 has revealed the following shocking figures :-


(Rs Crores)

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  As on 31/03/2011 As on 31/03/2012 Net Increase % Increase
Total Deposits 933933 1043647 109714 11.75
Cash in Hand 7477 11186 3709 49.61


I am sure Mr Chaudhuri must be aware that cash in hand does not earn any profits but is a drain on the system as higher cash at branches require higher space, more security and can lead to higher frauds and thefts.   Thus, instead of advising RBI, there is a need to look into his own house and ensure that idle cash is utilised properly.


I have already written an article about "Cartelization by PS Banks to keep saving bank interest rates at 4%".   This is nothing but a fraud on our rural customers who are denied market related interest rates.   I can guarantee that in case Mr Chaudhuri is asked that he should also pay 6% to 7% interest on saving bank deposits like Yes Bank, SBI will be in red soon.  


Mr Jain further writes in his email "Everywhere in the world there is system of having safety valve like CRR and SLR to protect the interest of depositors and investors. I am unable to understand why bankers have gone insane and demanding removal of safety valve which is meant for providing safety to them also in addition to investors and depositors. Indian has also experienced worst situation arising out of frequent cases of bankruptcy of private banks  before 1969 when private banks, chit funds, Non Banking companies used to collect deposits from public offering attractive interest rate and then all of a sudden declare closure of banks. Even in recent past , we have experienced several cases of closure of many cooperative banks, scheduled banks, chit funds and NBCC because of their ill motivated actions and because of non-existence of or failed safety valve"



Such a statement from the top lender is even more surprising as this bank popularly known as "Daddy" has thousands of crores of rupees from government departments at zero cost.  Even if 50% of such deposits can managed by government departments more prudently, SBI will turn into a sick bank.


Now question arises, if a small banker like me is aware of such facts, then how come a seasoned banker like Mr Chaudhuri is unaware of these facts.   I feel there is something deeper.   The recent adverse publicity PS Banks, specially SBI, is getting on account of ever increasing NPAs is putting a pressure on SBI chief.   He appears to be adopting diversionary tactics so that media attention is diverted to other radical views and his bank is saved from regular media bashing



The above tactics do not auger well for Indian banking industry and I feel SBI has started bleeding internally and Mr Chaudhuri has started feeling the pain of this bleeding.   He appears to have become aware that their are no easy answers for the sorry state of affairs and it is becoming more and more difficult to keep a lid on the misdeeds of top management and politicians.   The mood is reflected in the last sentence of a new item, where Mr Chauduri termed the current norms of classification of a NPA as "draconian and detrimental".   The word used are too harsh and are like slap on the face of RBI.   It only means that Mr Chaudhuri feels RBI does not understand banking.     I will not be surprised now if in next interview Mr Chaudhuri  advises RBI that the concept of NPA needs to be abolished.  


If this is true, bad days are ahead for the bankers as these have been in recent times for Air India.




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