What changed
The Reserve Bank of India (Amendment) Bill, 2006 removed the floor rate of 3% for CRR under Section 42(1) of the RBI Act, 1934, giving RBI full flexibility to set CRR without any statutory minimum. Consequently, the earlier statutory minimum CRR of 3% no longer applies to Scheduled State Co-operative Banks and Regional Rural Banks. Additionally, sub-section (1B) of Section 42 was omitted, meaning RBI will no longer pay interest on CRR balances maintained by these banks.
What it means for you
For StCBs and RRBs, the removal of the CRR floor gives RBI greater monetary policy flexibility, but the immediate CRR requirement remains unchanged at 5%. The cessation of interest on CRR balances will reduce the return on these reserves, effectively increasing the cost of maintaining CRR for these banks. Banks must adjust their liquidity management to account for the loss of interest income on CRR funds.
What you must do
- Continue maintaining CRR at 5% of total demand and time liabilities as per existing instructions.
- Note that no interest will be paid on CRR balances from the fortnight beginning June 24, 2006, so factor this into your liquidity and profitability planning.
- Refer to the separate circular RPCD.RF.BC. 94/07.02.01/2005-2006 for details on exemptions applicable to CRR maintenance.
- Acknowledge receipt of this circular to your respective Regional Office.
Who it affects
All Scheduled State Co-operative Banks (StCBs), All Regional Rural Banks (RRBs)
What is the new CRR requirement for StCBs and RRBs after this circular?
The CRR requirement remains unchanged at 5% of total demand and time liabilities. The only change is that the statutory minimum floor of 3% has been removed, giving RBI discretion to set any rate.
Will RBI pay interest on CRR balances maintained by StCBs and RRBs?
No. With the omission of sub-section (1B) of Section 42, RBI will not pay any interest on CRR balances from the fortnight beginning June 24, 2006.
Does this circular affect the exemptions previously available for CRR maintenance?
The circular states that the existing exemptions continue to apply, as detailed in the separate notification RPCD.RF.No.6107/07.02.01/2005-2006 dated June 22, 2006.