Reserve Bank of India gives CRR relief to banks for 5 years

The Reserve Bank of India on Monday asked banks to avail the cash reserve ratio (CRR) exemption on home, auto and MSME loans for a period of five years.

The move will help in bringing down the cost of capital for the lenders and transmission of RBI interest rate cuts easier.

At present, the bank is required to park Rs 4 with the RBI for every Rs 100 earned by them under the regulatory cash reserve ratio requirements. This implies if a bank lends Rs 25 out of the Rs 100 it earns, it can retain Re 1 with itself and pay only Rs 3 to RBI.

Under this CRR leeway, banks can avail themselves of CRR exemption for five years for incremental credit extended to automobiles, residential housing, micro, small and medium enterprises (MSMEs) between 31 Jan to 31 July 2020, the RBI said in a statement.

“The Reserve Bank is actively engaged in revitalising the flow of bank credit to productive sectors having multiplier effects to support growth impulses. Accordingly, banks are allowed to deduct the equivalent amount of incremental credit disbursed by them as retail loans to automobiles, residential housing, and loans to micro, small and medium enterprises (MSMEs)," it said.

This could be over and above the outstanding level of credit to these segments as at the end of the fortnight ended January 31, 2020 from the net demand and time liabilities (NDTL) for maintenance of the cash reserve ratio (CRR).

Banks were asked to claim the first such deduction from the NDTL of February 14, 2020, for the amount equivalent to the incremental credit extended to the sectors indicated above over the outstanding level of credit as at the end of the fortnight ended January 31, 2020.

The move was first announced in the monetary policy last week along with other measures to push growth and lower lending rates to consumers by banks.

To ensure cheaper retail loans to borrowers, it relaxed regulatory requirements of lenders and promised to extend long term (1-3 years) funds of up to Rs 1 lakh crore to them at a concessional rate of 5.15%.

The move will help banks cut their lending rate, thus lowering the EMI burden on borrowers.