Cash Deposit Ratio continues to be still High

Is the Cash Deposit Ratio of Indian Scheduled Commercial Banks very high?
The Cash -Deposit ratio of scheduled commercial Banks in India (Cash in hand and Balances with RBI as percentage of Deposits) is observed to be high at 8.2% for all scheduled Commercial Banks as at end march 2011. The ratio ranges between 6.9% (old Private Sector banks) and 9.2% (New generation Private sector banks). This includes the Cash Reserve Ratio of 6 percent statutorily required to be maintained with the Reserve Bank in terms of the Reserve Bank Act 1934 which has since been brought down to 5.5 % in the recent credit policy review held in January 2012. The need for such a high cash deposit ratio ratio, in these days when plastic cards, inter-net payments, electronic funds transfer etc are on the increase is surprising and needs to be viewed seriously in the context of efficiency and profitability of banks. In fact the ratio which remained at 7.1% in March 2002 has gone up to 8.2% in March 2011.
Since the culture of ATMs has been spreading fast, no doubt the banks need to maintain hard cash to meet the demands of customers. There are 74505 ATMs functioning all over the country as at end March 2011.The public preference for hard cash continues to be strong perhaps indicating lack of spread of banking habit in its fullest sense, the persistence of corruption, prevalence of black money, high level of inflation and general insistence for cash payments for commodities like gold and silver in particular. The high level of cash transactions in the economy necessitates more physical notes in circulation adding responsibilities to the Reserve Bank and increasing the Seignorage cost. This has been well evidenced in the increase in Bank notes in circulation by 18.7% i.e. from Rs.7, 88,299 crores in March 2010 to Rs. 9, 35,856 crores in March 2011.
Banks have been provided with currency chests to improve their cash management. The Reserve Bank through its 18 issue offices, one sub office and a wide net work of 4248 currency chests carries out the issue of notes and management of currency and helps the banking system to improve its funds management.
The cash deposit ratio of late, seems to have its importance it had in the good old days. With the implementation of prudential norms as per Narasimham Committee’s recommendations on Financial System and Banking sector reforms and also Basel I and Basel ii guidelines for improving banks’ efficiency, productivity and profitability, the attention paid in the maintenance of cash and the cost it adds to banks’ overall cost of funds seems to have been somewhat missing affecting adversely the profitability of banks among other things. The old private sector bank maintains the best cash deposit ratio (at 6.9%) and their cost of borrowings is comparatively the lowest (at 2.2%) as on March 2011 among all the bank groups.

Position of Cash Deposit Ratio* of All Commercial Banks

As at end March
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
7.1 6.3 7.2 6.4 6.7 7.2 9.7 7.3 7.7 8.2
• Cash in hand and balances with RBI as percentage of Deposits.
Position of ATMs of Scheduled Commercial Banks:
(As at end March 2011)
Sl. No. Public Sector Banks Old Private Sector Banks New Private Sector Banks Foreign Banks All Scheduled Commercial Bank
1 2 3 4 5 6 7
1. On-Site ATMs 29,795
(23,797) 2,641
(2,266) 8,007
(6,337) 286
(279) 40,729
(32,679)
2 Off-Site ATMS 19,692
(16,883) 1,485
(1,124) 11,518
(8,720) 1,081
(747) 33,776
(27,474)
3 Total No.of ATMs 49,487
(40,680) 4,126
(3,390) 19,525
(15,057) 1,367
(1,026) 74,505
(60,153)
Figures in brackets relate to March 2010
Source: Report on Trend and Progress of Banking in India 2010-11.
Payment and settlement system has been well strengthened over a period to facilitate smooth functioning of financial markets in particular and the economy in general. Both paper based like Express cheques clearing and grid based cheques truncation system and electronic payments like electronic clearing service, electronic funds transfer systems have been very well developed to ensure fast, efficient and well secured payment and settlements not only to obviate the need for physical movement of cash but also to bring in efficient funds management among banks. The Reserve Bank has thus streamlined the process flow in credit push systems like National Electronic Funds transfer, Real Time Gross Settlement, Electronic Credit System (credit) and National Electronic Clearing Service systems and banks are in a position to credit beneficiaries account without any hassles.
With all these facilities, the cash held at banks has been found to be very high and needs to be reviewed and fine tuned for improved efficiency. The cost of funds of banks at 4.7% and the cost of borrowings observed at 2.3% for all scheduled commercial banks as at end March 2011 can be further brought down by minimizing cash balances and related costs. Since the funds management leaves much to be desired, the banks can do a lot by improving the banking habit, spreading the card culture, enhancing the use of cheque and electronic payment systems and putting into optimum use of currency chest facilities.
There is ample scope to reduce the physical handling of cash at branches and banks and save all related expenditures. The cash and bank balances have to be considerably brought down taking advantage of the improved telecommunication system and facilities provided by the Reserve Bank. The asset liability management of the banks will also improve in the process. The Govt and the Reserve Bank can also bring in policy changes by insisting on payments beyond a cutoff point say Rs 5000 by means of instruments like cheque or plastic cards or through electronic payment systems. Payments of cash to organized and unorganized sector where ever possible and feasible should be made only through banks and banking instruments. This will help to reduce the cost and other administrative hassles faced by the Reserve Bank in the issue of currency notes. Less cash in circulation is also an indicator of economic development in general and banking development in particular is a fact which cannot be underestimated by policy makers. Such an approach will also facilitate strengthening Financial and Banking inclusion.

T.V.Gopalakrishnan
(This article appeared in Business Line dated 7/02/12).