On September 8, 2023, the Reserve Bank of India (RBI) issued a circular addressing the Chairperson and CEOs of all Scheduled Commercial Banks, Regional Rural Banks, and various types of Co-operative Banks. The announcement pertains to Section 42(1A) of the Reserve Bank of India Act, 1934, specifically about the requirement for maintaining an additional Cash Reserve Ratio (CRR). The key takeaway is RBI’s decision to discontinue the Incremental Cash Reserve Ratio (I-CRR) in a phased manner. This article dives deep into what this announcement means, its impact on the financial system, and how it affects various types of banks.
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What is Incremental CRR (I-CRR)?
Cash Reserve Ratio (CRR) is the percentage of deposits that banks are required to keep with the RBI. Incremental CRR is an additional CRR that banks have to maintain over and above the standard CRR. It was designed as a monetary policy tool to manage excess liquidity in the financial system.
The Phasing Out Plan
According to the circular, the RBI plans to release funds impounded under the I-CRR in stages. The schedule for release is as follows:
- On September 9, 2023: 25% of the I-CRR maintained will be released.
- On September 23, 2023: Another 25% of the I-CRR will be released.
- On October 7, 2023: The remaining 50% will be released.
Reasons Behind the Decision
The RBI cited the “current and evolving liquidity conditions” as the primary reason for this change. The phased manner aims to ensure that the system liquidity is not subjected to sudden shocks and that the money markets function in an orderly manner.
Impact on Banks
Scheduled Commercial Banks
For commercial banks, the phased reduction in I-CRR would likely mean more funds available for lending, thereby potentially increasing their net interest margin.
Regional Rural Banks
This group may benefit from increased liquidity, which they can then invest in rural development schemes.
Co-operative Banks
Like the others, co-operative banks will also have increased liquidity which they can use for providing more loans to their community-based customer base.
Regulatory Requirements
The circular also outlines that the banks are required to maintain an “additional average daily balance” for a specified period. This appears to be a transitionary measure to manage liquidity as the I-CRR is phased out.
Conclusion
The Reserve Bank of India’s decision to phase out the Incremental Cash Reserve Ratio reflects changing liquidity conditions in the financial system. The phased release of these funds aims to prevent any sudden shocks to the system and help money markets function more smoothly. Banks of all types are likely to benefit from this move, as it provides them with more liquidity that can be used for lending or other investments. However, they must still navigate the transitionary period carefully, keeping in mind the additional average daily balance requirements.
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Reserve Bank of India
RBI/2023-24/59
DOR.RET.REC.34/12.01.001/2023-24
September 08, 2023
The Chairperson / CEOs of all Scheduled Commercial Banks / Regional Rural Banks / All Scheduled Primary (Urban) Co-operative Banks / All Scheduled State Co-operative Banks
Madam / Dear Sir,
Reserve Bank of India Act, 1934 – Section 42(1A) – Requirement for maintaining additional CRR
Please refer to the circular DOR.RET.REC.29/12.01.001/2023-24 dated August 10, 2023 and relative notification on the captioned subject.
2. As announced in the RBI Press Release dated September 08, 2023, on a review, it has been decided to discontinue the incremental CRR (I-CRR) in a phased manner. Based on an assessment of current and evolving liquidity conditions, it has been decided that the amounts impounded under the I-CRR would be released in stages so that system liquidity is not subjected to sudden shocks and money markets function in an orderly manner. The release of funds would be as follows:
| Date | Amount to be released |
| September 09, 2023 | 25 per cent of the I-CRR maintained |
| September 23, 2023 | 25 per cent of the I-CRR maintained |
| October 07, 2023 | 50 per cent of the I-CRR maintained |
3. A copy of the relative notification DOR.RET.REC.35/12.01.001/2023-24 dated September 08, 2023 is
Yours faithfully,
(Brij Raj)
Chief General Manager
DOR.RET.REC.35/12.01.001/2023-24
September 08, 2023
NOTIFICATION
In exercise of the powers conferred by sub-section (1A) of Section 42 of the Reserve Bank of India Act, 1934 and in modification of the earlier notification DOR.RET.REC.30/12.01.001/2023-24 dated August 10, 2023, the Reserve Bank of India hereby directs that all Scheduled Commercial Banks / Regional Rural Banks / all Scheduled Primary (Urban) Co-operative Banks / all Scheduled State Cooperative Banks, shall maintain with the Reserve Bank of India, an additional average daily balance over and above the average daily balance required to be maintained under sub-section (1) of Section 42 during the following fortnights as under:
|
During the fortnight |
Amount to be maintained |
| September 09-22, 2023 | an additional average daily balance which shall not be less than 7.5 per cent of the increase in net demand and time liabilities between May 19, 2023 and July 28, 2023 |
| September 23, 2023 – October 06, 2023 | an additional average daily balance which shall not be less than 5.0 per cent of the increase in net demand and time liabilities between May 19, 2023 and July 28, 2023 |
| From October 07, 2023 | Nil |
(Jayant Kumar Dash)
Executive Director
