The Reserve Bank of India (RBI) on Monday announced that banks would not be required to maintain the 4 percent Cash Reserve Ratio (CRR) for five years on their deposits for an amount equivalent to loans given out to the housing, auto and MSMEs between January 31 and July 31. The move is set to help lenders lower the costs of deposits in turn transferring benefits to the customer.
What is Cash Reserve Ratio (CRR)?
The Reserve Bank of India or RBI mandates that banks store a proportion of their deposits in the form of cash so that the same can be given to the bank’s customers if the need arises. The percentage of cash required to be kept in reserves, vis-a-vis a bank’s total deposits, is called the Cash Reserve Ratio. The cash reserve is either stored in the bank’s vault or is sent to the RBI. Banks do not get any interest on the money that is with the RBI under the CRR requirements, explains Financial Express.
The RBI takes stock of the CRR in every monetary policy review that is conducted every six weeks. The CRR helps the RBI maintain a desired level of inflation and control the money supply and liquidity in the economy. A lower CRR is better as it allows higher liquidity in banks, allowing more investment and lending. A high CRR can negatively impact the economy as lesser availability of loanable funds slows down investment thereby reducing the supply of money in the economy.
Details of the current CRR relief
The RBI announced that the special lending window for such loans would open on February 14, 2020 for and said that it would allow relaxations on these three productive sectors as they could have “multiplier effects to support growth impulses”.
The economic research wing of the State Bank of India (SBI) this move of the SBI would release Rs. 4,000 crore for six months as extra credit to commercial banks, The Telegraph India reported.
“Exemption of CRR maintenance for all additional loans given for retail loans for automobiles, residential housing, and loans to MSMEs is positive for banks. It will also help to lower the cost of funds,” SBI chairman Rajnish Kumar said.
Anuj Puri, Chairman, Anarock Property Consultants told The News Minute that though the move would help ease out the time for maintaining and managing cash flows for cash-strapped developers and help them to complete several projects, it would not address the issue of continuing low demand.
The MSME sector plays an important role in the growth of the Indian economy and contributes over 28 percent of the GDP and employs about 11 crore people. The RBI said the restructuring of the borrower account has been extended by further one year to March 31, 2021.
Deutsche Bank’s Kaushik Das said, “I think rates can still go lower, but what RBI has done today it has created an enabling kind of situation so that MSME and all these sectors can grow at a faster pace, credit growth can be a little higher than what we have had in the past.”
Objectives of the CRR and how it helps during inflation
The CRR serves two major objectives.
The first – Since a part of the bank’s deposits are with the RBI, the security of that amount is ensured. This makes cash to be readily available when the customers want their deposits back.
The second – The CRR helps in controlling inflation. During times of high inflation, the CRR is increased so that banks keep more money with the RBI in its reserves and have less money to lend further.
When the cash reserve ratio is minimised, commercial banks will have more funds, thus increasing the money supply of the banking system. In this way, inflation can be directly controlled by means of increasing the CRR rate and thereby restricting the ability of commercial banks to lend money.
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