Bankers are awaiting clarity on exemption on maintenance of cash reserve ratio (CRR) amid confusion over how the incentive for lenders will be calculated after the Reserve Bank of India (RBI) eased regulatory norms for retail loans to boost demand in the sagging economy in its monetary policy meet on February 6.
Lenders say they will not avail the benefit till there is clarity as any miscalculation in CRR could invite penalties. They have written to the RBI seeking clarity on the basic aspects of the scheme and how it will work, and are awaiting a reply from the central bank before factoring it in their calculations.
“There are some questions because the RBI notification says the exemptions are based on incremental disbursals but it is silent on how repayments will be treated? As this incentive is also for loans to micro, small and medium enterprises (MSMEs), how should we calculate the exemptions on cash credits, which are typically dynamic and repaid or topped up according to the clients’ needs. Unfortunately, we have lost a full fortnight waiting for the clarification,” said a senior executive of a large Public Sector Bank.
RBI did not respond to an email seeking comment.
In its monetary policy review on February 6, RBI had exempted banks from maintaining CRR on deposits for the amount equivalent of incremental credit disbursed by them as retail loans to automobiles, residential housing, and loans to MSMEs as at the end of the fortnight ended January 31, 2020. This scheme is in effect till the fortnight ending July 31 and for a period of five years from the date of origination of the loan or the tenure of the loan, whichever is earlier.
The first such CRR exemption from deposits was supposed to kick in from the fortnight ended February 14.
“The RBI notification says incremental disbursements from outstanding loans to these sectors will receive CRR exemptions. However, we want to know whether repayments have to be adjusted.
Like if the outstanding loans for residential housing for a bank is at Rs 100 crore and it lends Rs 10 crore in the fortnight while another Rs 10 crore is repaid, is the bank not eligible for any CRR exemption because the repayment will net off the incremental loans, or will the incremental loans be seen as a net of repayments?” asked a treasurer of a private sector bank.
Bankers are hoping the RBI allows them to adjust the repayments every fortnight with the outstanding loans to incentivise new lending. “If repayments are adjusted from the outstanding, it will give banks a real incentive to lend. The RBI has done it before and we expect some clarification this week because the issue is ultimately credit growth,” said the treasurer.
In the fortnight ended January 31, credit growth was at a 58-year low of 7.1 per cent. Allowing exemptions on CRR for loans will incentivise the banks to lend and could channel credit where demand is high. Banks have to mandatorily keep 4 per cent of their deposits with RBI as CRR, without earning any interest. Assuming their cost of funds is at the 6 per cent, the exemption from CRR will help them make an extra 25 basis points in lending to these sectors. One basis point is 0.01 percentage point.