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Our Bureau

Banks heave sigh of relief

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Mumbai Feb. 23 The Reserve Bank of India has decided to pay graded interest on eligible CRR balances held above the minimum 3 per cent. Till now the RBI was not paying any interest on CRR balances deposited with it . Presently the cash reserve ratio stands at 5.75 per cent and the RBI will pay 1 per cent interest on all eligible balances above the minimum 3 per cent from February 17, 2007 till further notice. The RBI raised CRR in two phases on February 13 from 5.50 per cent to 6 per cent with the first phase of 5.75 per cent being effective February 17; the second phase from 5.75 per cent to 6 per cent will kick in on March 3.

Eligible Balances

An RBI press release says it will pay 3.5 per cent interest on eligible CRR balances for the period June 24, 2006, to December 8, 2006, and 2 per cent for the period December 9, 2006, to February 16, 2007. The dates for calculating eligible balances coincide with the changes effected in CRR by RBI.

The central bank had suspended payment of interest on CRR on June 24, 2006, following the amendment to the RBI Act. The RBI (Amendment) Act, 2006, which has received Presidential assent, provides for scrapping of minimum (3 per cent) and maximum (20 per cent) CRR and also payment of interest on them by the central bank. But the Amendment has not been backed by a Government notification allowing the RBI to offer some compensation to banks on the portion of their impounded deposits as an interim measure. Once the notification is issued, the RBI will suspend payment of interest on the total CRR balances, said top bankers.

Dilution Effect

For long banks have been lobbying the RBI to pay a price on the CRR balances. For the RBI interest paid to banks would dilute the effect of any rise in CRR, a major anti-inflationary instrument

Mr M.B. N Rao, Chairman and Managing Director, Canara Bank, said the move would subsidise the bank's costs. . "It is certainly a relief for the banking system and will increase the profitability of the banks," said Mr P. Mukherjee, Senior Vice-president, Treasury, UTI Bank.

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