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RBI’s exemption will raise interest income of banks by reducing the amount of funds they have to maintain as CRR (Aniruddha Chowdhury /Mint)
RBI’s exemption will raise interest income of banks by reducing the amount of funds they have to maintain as CRR (Aniruddha Chowdhury /Mint)

Move to raise credit flow with CRR relief falls short

RBI says incremental credit eligible for CRR exemption has to be net of repayments

MUMBAI : A Reserve Bank of India (RBI) attempt to incentivize credit flow to the retail sector with cash reserve ratio (CRR) exemption seems to have fallen short of the banking industry’s expectations, despite clarifications by the central bank.

In a FAQ released on Wednesday, RBI said that the incremental credit eligible for CRR exemption, or the amount of incremental credit that can be set off against the net demand and time liabilities (NDTL) for calculating CRR has to be net of repayments.

“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 CRR," RBI had said in its February monetary policy.

RBI also said the exemption will be open from 14 February and incremental loans disbursed will be eligible for the benefit of deduction from NDTL for 5 years.

Bankers,however, believe that the amount of relief on account of this exemption is very limited and therefore will not have a huge impact on credit growth.

“The earlier understanding was that whatever loan you will give, the outstanding of those loans will be deducted from CRR. If repayment will be coming for any loan given during the six-month period, it will be deducted from the outstanding. It would be difficult to track large repayments," said a public sector banker on condition of anonymity. The six-month period runs from February to July. The quantum of repayments will be large and it has to be deducted from incremental credit every month for availing of CRR exemption.

At present, banks earn no interest on money kept with RBI under CRR, which is fixed at 4% of NDTL. RBI’s CRR exemption aims to raise credit growth and increase the interest income of banks by reducing the amount of funds banks have to maintain as CRR. The lower the CRR requirement, the better it is for banks as they can lend that much more and earn interest.

Ananth Narayan, associate professor (finance) at SP Jain Institute of Management and Research, concurred that the CRR exemption is unlikely to make a difference to credit growth. “The benefit to banks is in the region of 0.25% per annum on the incremental loan amount between 31st January 2020 and 31 July 2020 to automobiles, residential housing or MSMEs sectors," he said.

RBI clarified on Wednesday that the incremental credit will be reduced to the extent of repayments and non-performing assets, and the net amount of incremental credit will be eligible for the benefit of deduction from NDTL for a maximum period of five years.

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