What changed
The government notified January 9, 2007 as the effective date for most provisions of the RBI (Amendment) Act, 2006, but Section 3—which would remove the CRR floor (3%) and ceiling (20%) and stop interest on eligible CRR balances—remains un-notified. Consequently, the statutory minimum CRR of 3% and maximum of 20% continue. RBI also raised the effective CRR to 5.75% from Feb 17, 2007 and to 6.00% from Mar 3, 2007, and reduced interest on eligible CRR balances to 1% per annum from Feb 17, 2007.
What it means for you
Banks must continue to maintain CRR within the 3%-20% band, with the effective rate now at 6% from March 2007. The phased reduction in interest on eligible CRR balances—from 3.50% to 2.00% to 1.00%—lowers the return on idle reserves, squeezing net interest margins. The exemption from penal interest for breaches of the 3% floor between June 22, 2006 and March 2, 2007 provides temporary relief for compliance errors during the transition.
What you must do
- Ensure CRR maintenance at 6.00% of total demand and time liabilities from the fortnight beginning March 3, 2007.
- Update internal systems to reflect the reduced interest rate of 1% per annum on eligible CRR balances from Feb 17, 2007.
- Review past CRR compliance for the period June 22, 2006 to March 2, 2007 to avail the penal interest exemption for breaches of the 3% floor.
- Monitor any future notification of Section 3 of the Amendment Act, which could remove the CRR floor/ceiling and stop interest payments.
Who it affects
All Scheduled Commercial Banks (excluding Regional Rural Banks), Treasury and ALM departments, Compliance and regulatory reporting teams
Why is the CRR floor of 3% and ceiling of 20% still in force?
Section 3 of the RBI (Amendment) Act, 2006, which would remove these limits, has not been notified by the government. Until it is, the existing statutory minimum and maximum CRR under Section 42(1) of the RBI Act, 1934 remain applicable.
What interest will banks earn on CRR balances from February 17, 2007?
From the fortnight beginning February 17, 2007, RBI will pay interest at 1.00% per annum on eligible cash balances maintained under CRR requirements. This is a reduction from the earlier rates of 3.50% (June 24 to Dec 8, 2006) and 2.00% (Dec 9, 2006 to Feb 16, 2007).
Are there any penalties waived for past CRR shortfalls?
Yes. Banks that breached the statutory minimum CRR of 3% between June 22, 2006 and March 2, 2007 due to CRR exemptions in computing demand and time liabilities are exempted from penal interest for that period.