The Reserve Bank of India (RBI) has recently said the amount equivalent to incremental credit disbursed by banks to specific sectors will be eligible for deduction from their deposits for computing the cash reserve ratio (CRR) for five years from the date of origination of the loan or the tenure of the loan, whichever is earlier.
Retail loans for automobiles and residential housing, as well as loans to micro, small and medium enterprises (MSMEs), come under the ambit of specific sectors.
In a bid to incentivize bank credit, RBI has allowed scheduled commercial banks to deduct the equivalent of incremental credit disbursed by them as retail loans for automobiles, residential housing, and loans to MSMEs, over and above the outstanding level of credit to these segments as at the end of the fortnight ended January 31, 2020, from their deposits for maintenance of CRR.
This exemption will be available for incremental credit extended up to the fortnight ending July 31, 2020.
The RBI has advised banks that they can claim the first such deduction from the deposits of February 14, 2020, for the amount equivalent to the incremental credit extended to the specific sectors over the outstanding level of credit as at the end of the fortnight ended January 31, 2020.
CRR is the slice of deposits that banks have to park with the RBI. Currently, it is at 4 percent of banks’ deposits. Banks don’t earn any interest on the CRR maintained with the RBI.
RK Gurumurthy, Senior Vice-President & Head - Treasury, Lakshmi Vilas Bank, said auto loans are usually for three or four years. So, banks get CRR exemption for one more year.
News Source: The Hindu Businessline, Url: https://bit.ly/3bDvPc7