Banks to RBI: Prefer CRR cut to repo rate

Will lower cost of funds,speed up transmission

Bankers favoured a reduction in cash reserve ratio (CRR) rather than the repo rate cut in the forthcoming monetary policy review of the Reserve Bank of India as it would reduce their cost of funds and make monetary transmission faster.

Banks would reduce their interest rates if the central bank cuts its key lending rate at its mid-term policy review on October 30.

KR Kamath,chairman of the Indian Banks Association,who also heads the state-run Punjab National Bank,said the central bank officials asked lenders if they would pass any reduction in policy rates to their customers,which has not been an usual practice with the central bank at such meetings.

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Kamath and other top bankers met RBI Governor D Subbarao and the four deputy governors at a pre-monetary policy consultation.

They (RBI) took a vote and most of us (bankers) voted for a CRR cut. In terms of the impact,there is no doubt the CRR (the portion of deposits that banks park with the RBI) has a great impact. We also mentioned that last time the CRR was cut,most banks had given effect to monetary policy transmission, State Bank of India chairman Pratip Chaudhuri told reporters after the meeting.

The RBI will unveil the mid-year monetary policy on October 30,where it is widely expected that he will bring down the interest rates following the raft of reform measures by the government over the past fortnight. It had cut CRR by 25 basis points in the mid-quarter review last month.

According to a PTI report,Chaudhuri said any reduction in the repo rate will have a bearing only on the sentiment.

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I have asked for 1.5 per cent cut in the CRR and if any repo cut happens,that will be 50 bps and that will be for the sentiment, Chaudhuri said.

Kamath said the bankers prefer a CRR cut over any other instruments. The position is that a CRR cut reduces the cost directly,so that is preferable, he said.

The RBI did ask that if the rate of interest is brought down,will there be a transmission. We said we will try for that, Kamath said.

Bankers also said the central bank is concerned about the slow growth in credit. Credit growth is not happening and apart from retail there is no growth, Chaudhuri said,adding,the central bank is concerned with slow growth. In Q2,the credit growth remained flat at 0.1 per cent.

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ICICI Banks Chanda Kochhar also said credit growth had settled at around 16 per cent,which is a concern.

The RBI is concerned about the asset quality. Because,all the banks mention that the asset quality scenario continues to be difficult and the companies are facing difficulty even in maintaining smaller liabilities, Chaudhuri said.