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RBI issues notification on CRR leeway for new retail, MSME loans

The RBI said in its notification on Monday that banks are advised that they can claim the first such deduction from the net demand and time liabilities (NDTL) of February 14, 2020.

RBI issues notification on CRR leeway for new retail, MSME loans

The Reserve Bank of India (RBI) said on Monday that banks need not maintain the cash reserve ratio (CRR) on new loans given between January 31 and July 30 for autos, homes and MSMEs for a period of five years. The RBI also sought to lower the loan rate for MSMEs by asking banks to link interest rates to the MSME segment to an external benchmark. It has also sought to free up capital for lenders by extending the forbearance on asset classification on their MSME portfolios till December 2020.

The RBI had said last Friday that banks need not downgrade the classification of commercial real estate assets where the project has been delayed for reasons beyond the promoter’s control for another year. “An amount equivalent to the incremental credit outstanding from the fortnight beginning January 31, 2020 and up to the fortnight ending July 31, 2020 will be eligible for deduction from net demand and time liabilities (NDTL) for the purpose of computing the CRR for a period of five years from the date of origination of the loan or the tenure of the loan, whichever is earlier, ” the RBI said in a release.

Interestingly, the final notification gives a five-year leeway to banks on the CRR front, which is way more than expectation of six months as per announcement in the credit policy last Thursday. The RBI had earlier announced in the credit policy to do away with mandatory requirement for banks to set aside cash of 4% for every new loan extended to retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs).

The RBI said in its notification on Monday that banks are advised that they can claim the first such deduction from the net demand and time liabilities (NDTL) of February 14, 2020. “Reserve Bank is actively engaged in revitalising the flow of bank credit to productive sectors having multiplier effects to support growth impulses,” said the central bank. The step from the RBI was widely regarded as a rate cut, without official tinkering of the key policy rate, repo.

In response to RBI’s announcements, banks have started reducing lending rates to customers. Bank of Baroda reduced marginal cost of funds-based lending rates (MCLR) by up to 10 basis points on Monday effective February 12. State Bank of India on Friday announced a reduction in its MCLR by 5 basis points across all tenures with effect from Monday (February 10).

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