What changed
RBI notified that Section 3 of the RBI (Amendment) Act, 2006, which would remove the CRR floor/celling and interest on eligible balances, has not yet been enforced. Consequently, the existing 3% minimum and 20% maximum CRR limits continue. Effective CRR rates for Urban Co-operative Banks were set at 5.75% from Feb 17, 2007, and 6.00% from Mar 3, 2007. Interest on eligible CRR balances was reduced to 1% p.a. from Feb 17, 2007, down from 2% p.a. for the period Dec 9, 2006 to Feb 16, 2007.
What it means for you
Urban Co-operative Banks must increase their CRR to 6% from March 3, 2007, tightening liquidity. The reduction in interest on eligible CRR balances to 1% p.a. lowers the return on reserves held with RBI, impacting net interest income. Banks that breached the 3% statutory minimum between June 22, 2006 and March 2, 2007 due to CRR exemptions are exempt from penal interest, providing some relief.
What you must do
- Ensure CRR is maintained at 5.75% for the fortnight starting Feb 17, 2007, and at 6.00% from Mar 3, 2007.
- Review demand and time liability calculations to comply with the revised CRR rates.
- Account for reduced interest income on eligible CRR balances at 1% p.a. from Feb 17, 2007.
- If your bank breached the 3% statutory minimum between Jun 22, 2006 and Mar 2, 2007 due to exemptions, document the exemption eligibility to avoid penal interest.
Who it affects
All Scheduled Primary (Urban) Co-operative Banks, Treasury and compliance departments of UCBs, RBI's monetary policy implementation for cooperative banks
What is the new CRR rate for Urban Co-operative Banks from March 2007?
The CRR rate is 5.75% effective from the fortnight beginning February 17, 2007, and increases to 6.00% from the fortnight beginning March 3, 2007.
Will RBI pay interest on CRR balances?
Yes, but at reduced rates: 3.50% p.a. from the fortnight beginning Jun 24, 2006 to Dec 8, 2006; 2.00% p.a. from the fortnight beginning Dec 9, 2006 to Feb 16, 2007; and 1.00% p.a. from the fortnight beginning Feb 17, 2007 onwards on eligible balances.
What happens if a bank's CRR falls below 3% during the transition period?
Banks that breached the 3% statutory minimum between June 22, 2006 and March 2, 2007 due to CRR exemptions are exempt from penal interest for that period.