Reduction in Cash Reserve Ratio

BE/RBI NOTE/49/2018

There are chances of RBI reducing the Cash Reserve Ratio (CRR) by 1% which is expected to bring around Rs. 1.2 lakh crore liquidity in the system.

1. With a huge pressure from the Government, there is a speculation of diluting the BANKS’ CAPITAL NORMS.
2. A reduction in CRR would avoid such a move as per reports available.
3. An one percent cut in the CRR would bring an inflow of Rs. 1.2 lakh crore into the system.
4. Obviously this means adequate liquidity in the system
5. At present RBI mandates that banks keep 4% of their deposits (Demand and Time Liabilities) with it in Cash which means locking up of around Rs. 5 lakh crore cash.
6. Also RBI has mandated the banks to maintain a minimum of 9% capital adequacy which includes a minimum of 5.5% as common equity Tier 1 (CET1) which is more stringent than the Basel III Capital framework which suggests 4.5% CET1.

General Views:

1. The government feels that higher capital means, that the Banks are unable to lend as per the market requirements.
2. Under the present conditions, PSU Banks require around Rs. 1.2 lakh crore as Tier1 Capital in the next five months as per ICRA findings.
3. This means the requirement exceeds by Rs. 21,000 crore more than what was pictured under Rs. 2.11 lakh crore recapitalization plans.
4. By March 2019 a sum of Rs. 99,000 crore is still required as per the original recapitalization plan since only Rs. 1.12 lakh crore only had been infused in banks in the past 18 months.

Note:

• The NDS (National Depository Securities) record reads that in October this year, Rs. 38,906 crore worth of domestic debt securities and equities were sold by FPIs, which happened to be the highest monthly outflow in this calendar year.
• As on October 26, 2018 bank loans grew by 14.6% year on year. However Non-Banking Finance companies reduced their lending in order to maintain their liquidity balance.
• Also, NBFCs sold about Rs. 18,000 crore retail portfolios to meet their repayment obligations as per ICRA report.
• Around Rs. 78,000 crore of Commercial paper was due for repayment in October 2018.