The Reserve Bank of India’s (RBI’s) attempt to incentivize credit flow to the retail sector by giving cash reserve ratio (CRR) exemption is unlikely to take off until the fine print is out.

Banks will seek clarity on implementation of the CRR exemption for incremental credit disbursed to automobiles, residential housing, and micro, small and medium enterprises (MSMEs), two bankers said on condition of anonymity.

In the February credit policy, RBI said, “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), over and above the outstanding level of credit to these segments as at the end of the fortnight ended 31 January 2020 from their (NDTL) for maintenance of the cash reserve ratio (CRR)."

The central bank also said that the exemption will be open from 14 February and incremental loans disbursed will have CRR exemption for five years.

Lenders say they are unsure if the incremental credit should be calculated at the portfolio level after excluding repayments. For instance, if a bank disbursed 5,000 crore worth of housing loans in a quarter and received repayments to the tune of 2,000 crore, the net growth will be 3,000 crore. Lenders want clarity on whether this net loan growth should be considered for calculating CRR exemption for the next five years.

Similarly, lenders say it is not clear if the incremental credit includes those already disbursed or just sanctioned.

“We are awaiting clarification from RBI on how to calculate this outstanding level of credit. For instance, we want to know how to consider CRR exemption on a housing loan sanctioned and disbursed over a period of 2-3 years," one of the two bankers said.

The central bank had allowed exemption to help revitalize credit flow to productive sectors that have multiplier effects to support impulses of growth.

The central bank’s efforts come amid a fall in credit growth to 7.14% in the fortnight ended 17 January compared to 7.51% in the previous fortnight.

CRR is currently at 4% of net demand and time liabilities (NDTL) or a sum of the bank’s deposits and borrowings. Typically, banks set aside CRR with RBI, but do not earn any interest on it.

The lower the CRR requirement, the better it is for banks, as they can lend that much more and earn interest.

In the previous policy, RBI had also promised to pump in 1 trillion into the banking system through long-term repo operations for one and three years. The exercise will begin from the fortnight of 15 February and, according to an RBI statement, is expected to “augment credit flows to productive sectors".

“In our estimate, this could add up to 1.3 trillion of fresh disbursements at a system level equivalent to 1% of outstanding loans. However, 4% of this amount would be exempt from CRR amounting to 0.03% of system NDTL," ICICI Securities said in a report.

Separately, RBI on Tuesday notified extension of the deadline for a one-time restructuring scheme of small business loans by another nine months to 31 December.

The central bank said that the aggregate exposure, including non-fund based facilities, of banks and non-banks to the borrower should not exceed 25 crore as on 1 January 2020. This recast, RBI said, will be applicable if the borrower’s account was in default but was a standard asset as on 1 January and continues to be classified as standard till the recast.

Shayan Ghosh contributed to this story.

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