RBI should consider giving interest on the huge CRR deposits made by the banks, argues Prof J.D. Agarwal:
While I welcome the decision of the Reserve Bank of India to ask banks to maintain 100% CRR for the deposits with them after 16 September 2016 in order to suck the liquidity from the system, I am of the view that the RBI should pay interest to commercial banks for maintaining 100% CRR of deposits with retrospective effect. Banks have been using the money deposited with them under IDS and after demonetization of higher denomination currency of Rs 500 and Rs 1000 notes in government bonds.
Under these 2 schemes banks are flooded with high denomination notes. In the post demonetization period since 8 November midnight, the banks have already received a deposit of over Rs 8 lakh crore till now, that is, 29 November 2016. According to RBI’s latest instructions to the banks, banks are required to maintain 100% CRR with retrospective effect earning zero return.
It is expected that the health and wealth of banks will improve with deposits of gigantic amounts, yet their profitability for the year 2016-17 may have a setback, as banks are required to pay interest on a large part of the deposits i.e. about 4% on saving and about 7% on fixed deposit while earning zero return for being deposited with RBI, as requirement of 100% CRR. However, banks may be able to recover a part of NPAs as well due to the process of demonetization.
