Money & Banking

RBI to restore the cash reserve ratio in two phases to 4%

Our Bureau. Mumbai | Updated on February 05, 2021

Quality lending, if undertaken, may enhance profitability for banks   -  istock/Denis Vostrikov

CRR will go up from 3 per cent to 3.5 per cent effective from March 27, and to 4 per cent effective from May 22

The Reserve Bank of India (RBI) has decided to gradually restore the cash reserve ratio (CRR) in two phases in a non-disruptive manner. This move is based on a review of monetary and liquidity conditions.

CRR, which is the slice of deposits that banks maintain with the RBI, will go up from 3 per cent to 3.5 per cent effective from March 27, 2021, and to 4.0 per cent effective from May 22, 2021.

To tide over the disruption caused by Covid-19, the CRR of all banks was reduced by 100 basis points to 3.0 per cent for one year ending on March 26, 2021.

 

The RBI said the CRR normalisation opens up space for variety of market operations of the RBI to inject additional liquidity. Even as it announced restoration of CRR to 4 per cent, the central bank extended the relaxation in the marginal standing facility (MSF) for six more months – up to September 30, 2021 – to provide comfort to banks on their liquidity requirements.

Currently, under MSF, banks can avail of funds by dipping into the Statutory Liquidity Ratio (SLR) up to an additional one per cent of their deposits – cumulatively up to 3 per cent of their deposits. This dispensation provides increased access to funds to the extent of ₹1.53 lakh crore, RBI said

The RBI decided to extend the dispensation of parking Government Securities (G-Secs) and State Development Loans (SDLs), acquired between April 1, 2021, and March 31, 2022, in the enhanced HTM (held to maturity) investment bucket up to March 31, 2023.

 

The benefit of this enhanced HTM limit, whereby banks can park G-Secs and SDLs equal to 22 per cent of their deposits, is that they need not provide for investment depreciation.

The extension of the aforementioned dispensation will provide certainty to the market participants in the context of the borrowing programme of the Centre and States for 2021-22, the RBI said. The HTM limits would be restored to 19.5 per cent in a phased manner starting from the quarter ending June 30, 2023.

Capital conservation buffer

The central bank decided to defer implementation of the last tranche of the Capital Conservation Buffer (CCB) of 0.625 per cent and also defer the implementation of Net Stable Funding Ratio (NSFR) by another six months from April 1 to October 1, 2021.

The regulator said it is necessary to enable banks to continue providing the necessary support to the process of recovery. CCB ensures that banks have an additional layer of usable capital that can be drawn down when losses are incurred. NSFR is defined as the amount of available stable funding relative to the amount of required stable funding.

Published on February 05, 2021

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