CRR balance may start fetching interest again
The government is planning to revisit the amendment to the RBI Act to enable the regulator to pay interest to banks on their cash reserve ratio (CRR) balances.
This could improve the profitability of the banks, which have to suddenly fork out Rs 13,500 crore more as reserves, without earning any interest on the sum. On Friday, the RBI announced a 0.5% increase in CRR to 5.5% in two phases.
The banks are facing a squeeze on profitability because of the rising inflation rate. At the same time, the finance ministry has been egging them to keep their lending rates to corporates unchanged. So, any move to reinstitute interest on CRR would be welcomed by the banks.
In June, with the amendment to the RBI Act, the floor level of banks’ CRR, which was kept at 3%, has been abolished along with the discontinuation of payment of interest on the sum parked with RBI. The banking industry has pitched in with a strong demand for resuming interest payment on their funds parked with RBI. The non-payment of interest on CRR is estimated to cost banks more than Rs 1,600 crore.
Till June, banks were required to keep 5% of their net demand & time liabilities (NDTL) with RBI in the form of CRR. Interestingly, the change in legislation is yet to be notified even as banks have stopped earning interest on their funds parked with RBI.
Banks did not earn interest on the entire cash balance. RBI had been paying 3.5% interest on cash balance above 3% and up to 5%, known as eligible cash balances, at an interest rate determined by the central bank with effect from September 18, 2004.
Meanwhile, RBI’s decision to hike the CRR — funds that banks park with it — will not affect their profitability, a senior finance ministry official said on Wednesday. “No impact on banks’ profitability,” special secretary (financial sector services) Vinod Rai told reporters on Wednesday, dismissing any impact on banks’ profitability due to hike in CRR.
The rise in CRR has been triggered by inflation touching 5.5%. Assuming the banking system would have deployed Rs 13,500 crore at an average rate of 9%, the returns would be to the tune of Rs 1,215 crore, and so the impact is minimal, officials said.
The government is planning to revisit the amendment to the RBI Act to enable the regulator to pay interest to banks on their cash reserve ratio (CRR) balances.
This could improve the profitability of the banks, which have to suddenly fork out Rs 13,500 crore more as reserves, without earning any interest on the sum. On Friday, the RBI announced a 0.5% increase in CRR to 5.5% in two phases.
The banks are facing a squeeze on profitability because of the rising inflation rate. At the same time, the finance ministry has been egging them to keep their lending rates to corporates unchanged. So, any move to reinstitute interest on CRR would be welcomed by the banks.
In June, with the amendment to the RBI Act, the floor level of banks’ CRR, which was kept at 3%, has been abolished along with the discontinuation of payment of interest on the sum parked with RBI. The banking industry has pitched in with a strong demand for resuming interest payment on their funds parked with RBI. The non-payment of interest on CRR is estimated to cost banks more than Rs 1,600 crore.
Till June, banks were required to keep 5% of their net demand & time liabilities (NDTL) with RBI in the form of CRR. Interestingly, the change in legislation is yet to be notified even as banks have stopped earning interest on their funds parked with RBI.
Banks did not earn interest on the entire cash balance. RBI had been paying 3.5% interest on cash balance above 3% and up to 5%, known as eligible cash balances, at an interest rate determined by the central bank with effect from September 18, 2004.
Meanwhile, RBI’s decision to hike the CRR — funds that banks park with it — will not affect their profitability, a senior finance ministry official said on Wednesday. “No impact on banks’ profitability,” special secretary (financial sector services) Vinod Rai told reporters on Wednesday, dismissing any impact on banks’ profitability due to hike in CRR.
The rise in CRR has been triggered by inflation touching 5.5%. Assuming the banking system would have deployed Rs 13,500 crore at an average rate of 9%, the returns would be to the tune of Rs 1,215 crore, and so the impact is minimal, officials said.
