Laws need to be changed for RBI to pay interest on CRR to banks: RBI Deputy Governor
By Neelima Shankar
Dec 11, 2012
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Under the existing laws governing the banking industry in the country, Reserve Bank of India cannot pay interest on cash reserve ratio (CRR) to banks, said the Deputy Governor of RBI, Mr. Kamlesh Chandra Chakrabarty. He mentioned that the present CRR deposit laws need to be modified for the central bank to be able to pay interest on CRR.

He said, "Under the present law, I can't pay interest on the CRR...that modification came four-five years back...The government should change the rule (for payment of interest on CRR). If the CRR is a cost on banks, then they can adjust that somewhere else."

Mr. K. C. Chakrabarty further added that CRR requirement has been made because only the banks can create money. To explain this he said, "Who creates money?...It's only bank deposits that too chequeable deposits or demand deposits that create money. That's why CRR is imposed only on banks...if a bank gives money to NBFCs, it will go not to NBFC but to some bank accounts (of NBFCs)."

It is to be noted that CRR or cash reserve ratio is that amount of deposits which the banks have to deposit with the Reserve Bank of India. They do not receive any interest on this deposit. At present, the CRR is 4.25 percent. Reportedly, the central bank earns a majority of its profits from CRR.

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