Finmin Wants RBI to Pay 7% Interest on CRR Deposits

Feels the move will help lower lending rates even if Reserve Bank of India does not ease monetary policy The finance ministry has suggested that the Reserve Bank of India pay 7% interest on the mandatory deposits parked with it by banks, one among several measures proposed to lower rates even if the central bank does not ease the monetary policy.  Finance minister P Chidambaram will take a call on the proposal, which would eventually go to the RBI.  "This is one among the many measures we have suggested to bring interest costs down," a senior finance ministry official told ET on condition of anonymity.  Chidambaram had last week indicated that the government was aware of the high interest rates and said "carefully calibrated risks" could be taken to stimulate investment, suggesting some innovation from the government to lower rates.  Banks have to mandatorily park a percentage of their deposits, called the cash reserve ratio, or CRR, with the RBI.  The central bank had stopped paying interest to banks on CRR in 2007.  Finance ministry officials are of the view that if the RBI were to pay interest at the reverse repo rate, or the rate at which banks park their surpluses with it, then banks will be able to lower their deposit rates, and eventually, lending rates will fall. At present, the CRR rate is 4.75%.  If the RBI were to agree to the proposal, banks will earn 7%, the reverse repo rate, on this portion of funds, helping them lower the cost of funds that can be passed on to borrowers. The RBI had not cut rates in its June 18 policy review because of the high inflation and lack of fiscal consolidation from the government.  An RBI official said the move may not bring down interest rates, as effective cuts in policy rates have not yet been transmitted by banks to borrowers.  "We have not seen any real transmission in spite of a 100 basis points SLR (statutory liquidity ratio) cut in July, 75bps CRR cut in March and 50 bps rate cut in April," the official said. "So how will this (paying interest on CRR) help is still a mystery to us." The country's largest lender, SBI, has not changed its base rate since August 2011. Only last week, the bank had reduced its interest rates on home and auto loans by up to 50 basis points. A day later, it lowered interest rates on domestic term deposits of maturity of five years and more by 25 bps to 8.50%. SBI offers auto loans at 10.75%, while home loans of over . 30 lakh are available at 10.25%.  Banks are not buying the argument.  "Interest rates cannot be changed overnight after a policy review," said the chairman of a state-run bank. "We have a cost of funds. If the interest rates are high, so are the deposit rates," he said, adding, "We have two set of customers and RBI should look at both ends of the spectrum."  But sector experts say any such move will only be helpful if bankers do away with "lazy banking," and stop relying on treasury income. "This move to pay interest on CRR should not become another window of safe haven in the long run," said KPMG's executive director Ravi Trivedi. Looking for Ways to Lower Rates  BANKS HAVE to mandatorily park a percentage of their deposits, called the cash reserve ratio (CRR), with the RBI.  At present, CRR rate is 4.75%  THE CENTRAL bank had stopped paying interest on CRR to banks since 2007  FINANCE MINISTRY  officials feel if RBI pays interest at the reverse repo rate, then banks will be able to lower their deposit rates, leading to fall in lending rates THE MOVE may not bring down interest rates, as effective cuts in policy rates have not yet been transmitted by banks to the borrowers  EXPERTS FEEL the move will only be helpful if bankers do away with 'lazy banking' SBI in Action  Country's largest lender, State Bank of India, has not changed its base rate  since August 2011  Last week, it reduced its interest rates on home and auto loans by up to 50 basis points  It has also lowered interest rates on domestic term deposits of maturity of five years and more by  25 bps to 8.50% P CHIDAMBARAM last week indicated that govt was aware of the high interest rates and 'carefully calibrated risks' could be taken to stimulate investment