The Reserve Bank on Monday said the special lending window with CRR exemption will be open from February 14 and incremental loans disbursed under this facility will have CRR exemption for the next five years. This means that banks will not be needed to make additional cash reserve ratio against any incremental loans disbursed to the targeted segments.
The window opens on February 14 for six months ending July 31, 2020, but the net demand and time liabilities (NDTL) will be calculated as of January 31, 2020, the central bank circular said this evening.
As an additional liquidity measure and also to nudge banks to lend more to the needy segments, the Reserve Bank at the last monetary policy announcement said banks, flushed with liquidity, could lend to these segments without making additional provisions without the requirement of parking additional cash reserve ratios (CRR), which is the money parked with the RBI without interest.
The productive sectors identified by the regulator are auto and residential housing loans, and also loans to micro, small and medium enterprises (MSMEs).
At the sixth bimonthly monetary policy on February 6, the RBI had said, "Banks can deduct the equivalent amount of incremental credit disbursed by them as retail loans to automobiles, residential housing, and loans to MSMEs (which have GST registration), over and above the outstanding level of credit to these segments as at the end of the fortnight ended January 31, 2020, from their net demand and time liabilities (NDTL) for maintenance of the CRR."
Detailing the time-line and operational details in a detailed circular, the RBI on Monday said, "Banks can claim the first such deduction from the NDTL of February 14, 2020 for the amount equivalent to the incremental credit extended to the above identified sectors over the outstanding level of credit as at the end of the fortnight to January 31, 2020.
"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 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.
The central bank feels revitalising credit flow to productive sectors like these can have multiplier effects to spur support growth.
The circular asks banks to report the CRR exemption availed at the end of a fortnight under "exemptions/others" in the Section 42 return, under the provisions of the master circular on CRR and SLR issued on July 1, 2015.
Proper fortnightly records of net incremental credit extended to these select sectors/NDTL exemption claimed, duly certified by the chief financial officer or an equivalent officer, must be maintained by banks for supervisory review, the circular said.
The RBI expects this special window to enable improved credit flow to needy sectors, reinforces monetary transmission, strengthens regulation and supervision, broadens and deepens financial markets; and also improves payment and settlement systems.
The RBI on June 6, 2019, set up an internal working group to review the liquidity management framework to simplify it and suggest steps to communicate the objectives and the toolkit for the same and the report was made public on September 26, 2019.
Following this, RBI fine-tuned the existing liquidity management framework and the revised framework fixed the marginal standing facility rate as its upper ceiling and the fixed rate reverse repo rate as the floor rate, with the policy repo rate in the middle of the corridor.
The special lending window however retains the width of the corridor is retained at 50 bps-the reverse repo rate being 25 bps below the repo and the MSF rate being 25 bps above the repo rate.
This also had the RBI withdrawing the daily fixed rate repo and four 14-day term repos and included fixed and variable rate repo/reverse repo auctions, outright open market operations, forex swaps and other instruments as new instruments for liquidity management.
A 14-day term repo/reverse repo operation at a variable rate and conducted to coincide with the CRR maintenance cycle would be the main liquidity management tool for managing frictional liquidity requirements.
The main liquidity operation would be supported by fine-tuning operations, overnight and/or longer, to tide over any unanticipated liquidity changes during the reserve maintenance period, the RBI said, adding if needed, the RBI will conduct longer-term variable rate repo/reverse repo operations of over 14 days, and accordingly last week, it introduced long term repos with one and three years of tenor.