What changed
The statutory minimum CRR requirement of 3% of net demand and time liabilities was abolished from April 1, 2007, following the Reserve Bank of India (Amendment) Act, 2006 coming into force. RBI can now prescribe CRR for scheduled commercial banks without any floor or ceiling. Additionally, sub-section (1B) of Section 42 of the RBI Act, 1934 was omitted, and RBI stopped paying interest on CRR balances maintained by banks from the fortnight beginning March 31, 2007.
What it means for you
Banks lose the safety of a known CRR floor, exposing them to potentially higher reserve requirements in tightening cycles. The removal of interest on CRR balances increases the effective cost of funds for banks, as maintaining CRR now yields zero return. Lenders must factor in greater CRR volatility in liquidity planning and asset-liability management.
What you must do
- Update internal CRR computation systems to reflect removal of the 3% statutory floor and zero interest on CRR balances.
- Prepare for potential CRR hikes by stress-testing liquidity buffers and contingency funding plans.
- Communicate the change in CRR cost structure to treasury and ALCO teams for revised funding cost estimates.
- Monitor RBI circulars closely for future CRR rate changes, as no floor or ceiling now applies.
Who it affects
All scheduled commercial banks (excluding RRBs), Treasury and ALM teams, Compliance and regulatory reporting departments
What is the CRR rate applicable from April 28, 2007?
From the fortnight beginning April 28, 2007, scheduled commercial banks must maintain CRR at 6.50% of net demand and time liabilities.
Will banks receive any interest on CRR balances after this change?
No. With effect from the fortnight beginning March 31, 2007, RBI stopped paying any interest on CRR balances maintained by scheduled commercial banks.
Does RBI now have unlimited power to set CRR?
Yes. With the removal of the 3% statutory floor, RBI can prescribe CRR for scheduled commercial banks at any rate without any floor or ceiling, subject to monetary stability needs.