SBI wants banks to hold government’s cash balance

In view of the liquidity crunch that banks have been facing for the last few months, the State Bank of India (SBI) – the country’s largest lender – has demanded that the government’s cash balances to be kept with the lenders (Banks) and not with the Reserve Bank of India (RBI).

Why?

Currently, the issue of high volatility in currency holdings of public (both in the form of cash and jewellery) as well as Government’s cash balances with RBI is leading to volatility in system liquidity.

• If cash balances are placed with public sector banks, instead of with RBI, the cash remains within the banking system and does not create unnecessary volatility in money markets.
• Besides, such an action will provide a clear picture of the money available within the system which will not get distorted by government borrowing.
• Also, if government keeps its cash with banks, it can even earn interest which the banks will offer. RBI offers no interest to the government for keeping its cash.

Background:

With government curtailing its spending towards the end of the last financial year, its cash balances with RBI had gone up. Bankers estimate the liquidity deficit in the system in March 2016 was over Rs. two lakh crore, mainly on account of lack of government spending, and the deficit was higher than the comfort level of RBI which is around Rs.75,000 crore.