RBI rejects FinMin proposal for interest on CRR

Ahead of the quarterly monetary policy, the Reserve Bank of India (RBI) has shot down the proposal of the finance ministry for payment of interest on cash reserve ratio (CRR) being maintained by scheduled commercial banks with the central bank.

This is the second time the RBI is rejecting the government proposal on interest payment on CRR — the portion of deposits to be kept with the RBI — to banks.

According to top-level sources, DK Mittal, secretary, department of financial services, wrote to the RBI, proposing payment of interest of CRR as currently, banks are not getting any interest on CRR . "The RBI has said no to the ministry's proposal on payment of interest on their CRR holdings," said a source.

If the RBI accedes to the government proposal, it will have to shell out close to Rs 19,000-20,000 crore — assuming an interest rate of 7 per cent — every year as interest on CRR. As total deposits of the banks amounted to Rs 64,10,000 crore as of November 2012, banks have kept around Rs 2,72,000 crore with the RBI at the current CRR level of 4.25 per cent. A section of bankers, led by SBI chairman Pratip Chaudhuri, has even demanded total abolition of CRR.

The RBI has argued that the annual transfer of surplus to the government will become negative if the central bank pays interest on CRR and subject the central bank to 'reputational risk'. In 2012, the RBI transferred surplus profit of Rs 16,010 crore to the government. The surplus profit to the government for 2011 was Rs 15,009 crore.

An RBI official said, "As per the amended RBI Act, it can't pay interest on CRR." In view of the amendment carried out to RBI Act, 1934, omitting Sub-Section (1B) of Section 42, the Reserve Bank does not pay any interest on the CRR balances maintained by scheduled banks with effect from the fortnight beginning March 31, 2007, says the RBI's master circular on CRR issued on July 2, 2012. However, sources said it was "a matter of interpretation" and there was "nothing that prevents the RBI from paying interest" on CRR.

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