What changed
The Reserve Bank of India (Amendment) Bill, 2006 removed the statutory floor of 3% CRR for scheduled banks, including urban co-operative banks. RBI can now set CRR without any floor or ceiling. The CRR rate for these banks stays at 5% for now, and interest on CRR balances is discontinued from the fortnight starting June 24, 2006.
What it means for you
Urban co-operative banks lose the interest income they previously earned on CRR balances, which will compress net interest margins. The removal of the CRR floor gives RBI full flexibility to adjust reserve requirements in future, potentially increasing or decreasing CRR without legislative constraints. Banks must adjust liquidity management as CRR becomes a more dynamic policy tool.
What you must do
- Update internal systems to stop accruing interest on CRR balances from June 24, 2006 fortnight.
- Review liquidity projections assuming CRR can be changed at any time without a statutory floor.
- Communicate the discontinuation of CRR interest to treasury and finance teams for accurate P&L reporting.
- Monitor RBI circulars for any future changes to the 5% CRR rate.
Who it affects
All Scheduled Primary (Urban) Co-operative Banks, Treasury departments of urban co-operative banks, Finance and compliance teams managing CRR calculations
What is the new CRR rate for urban co-operative banks after this circular?
The CRR rate remains unchanged at 5% of total demand and time liabilities. Only the statutory minimum floor of 3% has been removed, giving RBI flexibility to change the rate in future.
Will we still get interest on CRR balances maintained with RBI?
No. With the omission of Section 42(1B), RBI will not pay any interest on CRR balances from the fortnight beginning June 24, 2006.
Does this circular affect non-scheduled urban co-operative banks?
No. This circular applies only to Scheduled Primary (Urban) Co-operative Banks. Non-scheduled banks are not covered under Section 42 of the RBI Act.