RBI Notification

RBI Allows Cash Reserve Ratio Exemption for New Retail, MSME Loans: Read Full Story

RBI in its continuous effort of revitalizing the flow of bank credit and boosting demand, granted Banks, Cash Reserve Ratio (CRR) exemption for five years for incremental credit disbursed to automobiles, residential housing, and micro small and medium enterprises (MSMEs) between 31 Jan-31 July 2020. This means that Banks will not have to make additional Cash Reserve Ratio (CRR) against any incremental loans disbursed to the targeted segments. As per RBI’s press release, the special lending window with CRR exemption will be open from February 14.

The special lending window allowed by RBI is expected to improve credit flow to needy sectors, strengthen regulation and supervision, broaden and deepen financial markets, and at the same time improve payment and settlement systems.

What is the Cash Reserve Ratio (CRR)?

Cash Reserve Ratio (CRR) is a certain minimum amount of deposit that commercial banks have to hold as reserves with RBI. CRR is set according to the guidelines of the central bank of the country.

At present, CRR is 4% of net demand and time liabilities. Banks don’t earn any interest in maintaining CRR with the RBI.

With an aim to improve the credit flow to needy sectors RBI said Banks flushed with liquidity could lend to the needy segments without the requirement of parking additional CRR, which is money parked with the RBI without interest. The productive sectors identified by RBI are auto and residential housing loans and loans offered to micro, small and medium enterprises (MSMEs).

RBIs Press Release

“An amount equal to the incremental credit outstanding from the fortnight beginning January 31, 2020, and up to the fortnight ending July 31, 2020, will be entitled for deduction from Net Demand and Time Liabilities (NDTL) for the purpose of computing the CRR for a period of five years from the date of origination of the loan or the tenure of the loan, whichever is earlier,” the RBI said.

The circular issued by RBI asks banks to report the Cash Reserve Ratio (CRR) exemption availed at the end of a fortnight under “exemptions/others” in the Section 42 return, under the provisions of the master circular on CRR and SLR issued on July 1, 2015.

Proper fortnightly records of net incremental credit extended to these select sectors/NDTL exemptions claimed, duly certified by the chief financial officer or an equivalent officer must be maintained by banks for supervisory review, the circular said.

At present, CRR is 4% of net demand and time liabilities. Banks don’t earn any interest in maintaining CRR with the RBI.

Take Away

RBI’s decision of exempting Banks from maintaining Cash Reserve Ratio (CRR) for five years for retail and MSME loans is expected to make loans cheaper to these particular segments. This move from RBI shall boost the lending capability of scheduled banks and revitalize the flow of bank credit to productive sectors.