INDIA, Mumbai: With the Reserve Bank of India (RBI) planning to restore the Cash Reserve Ratio (CRR) of banks to the earlier level of 4%, the interest rate on fixed deposits is expected to go up, as indicated by the statement on developmental and regulatory policies (Part-B) of the monetary policy released by RBI on Friday.

The CRR is the percentage of the total deposit that banks have to mandatorily park with the apex bank. The move to raise CRR would suck about Rs 1.37 lakh crore primary liquidity from the banking system. To help banks tide over the disruption caused by COVID-19, the CRR of all banks was reduced by 100 basis points to 3.0 percent of net demand and time liabilities (NDTL) effective from the reporting fortnight beginning March 28, 2020, till March 26, 2021. Now because of monetary and liquidity conditions, RBI has decided to gradually restore the CRR in two phases in a non-disruptive manner to 3.5 percent effective from March 27, 2021, and 4.0 percent effective from May 22, 2021. The CRR normalization opens up space for a variety of market operations of the RBI to inject additional liquidity, RBI Governor Shaktikanta Das said.

Banks’ cost of fund likely to increase

But with this restoration of CRR, the rate of interest on loans is expected to go up, since banks’  cost of the fund is likely to increase and they are likely to pass on that cost increase to borrowers. RBI had reduced the CRR in November 2011 by 25 basis points from 4.25 percent to 4 percent. The CRR was maintained at a 4% level from February 2013 to January 2020. Now RBI wants to restore it to a long-term level of 4%.

The Reserve repo rate remains unchanged

The meetings of the RBI’s Monetary Policy Committee (MPC) were held from February 03 to February 05, which deliberated on current and evolving macroeconomic and financial developments. The MPC voted unanimously decided to keep the repo rate unchanged at 4 percent. To ensure that inflation remains within the target, the Marginal Standing Facility (MSF) rate and the Bank rate will remain unchanged at 4.25 percent. Also, the reverse repo rate stands unchanged at 3.35 percent. The repo rate is the rate at which RBI lends money to commercial banks in India if they face a scarcity of funds. Reverse Repo rate is the rate at which the RBI borrows funds from the commercial banks in the country.

Consumer protection

To make the Ombudsman mechanism simpler, it has been decided to integrate the Ombudsman for banks, NBFCs, and non-bank prepaid payment issuers (PPIs) and follow a ‘One Nation One Ombudsman’ approach. At present these schemes are operated by the RBI from twenty-two Ombudsman offices located across the country. This is intended to enable the customers to register their complaints with one centralized reference point. The Integrated Ombudsman Scheme will be rolled out in June 2021.

Liquidity Measures

Intending to support the revival of activity in specific stressed sectors that have both backward and forward linkages and have multiplier effects on growth, the RBI had announced the On Tap targeted long-term repo operations (TLTRO) for banks in October 09, 2020. Given that NBFCs are well-recognized conduits in reaching out to the last mile in various sectors, it is now proposed to provide funds from banks under the TLTRO on Tap scheme to NBFCs for incremental lending to the specified stressed sectors.

Credit to MSME Entrepreneurs

To incentivize new credit flow to the micro, small, and medium enterprise (MSME) borrowers, Scheduled Commercial Banks will be allowed to deduct credit disbursed to ‘New MSME borrowers from their net demand and time liabilities (NDTL) for calculation of CRR. New MSME borrowers would be those who have not availed of any credit facilities from the banking system as of January 01, 2021. This exemption will be available for exposures up to Rs.25 lakh per borrower for credit extended up to the fortnight ending October 1, 2021.

Inflation

By March 2021, the Government will be reviewing the inflation target for the next five years. CPI inflation moved below 6 percent in December for the first time in the post-lockdown period, supported by favorable base effects and a sharp fall in key vegetable prices. It is expected that vegetable prices will remain soft in the near-term, while pressures may continue to persist in certain key food items. The factors that could shape the food inflation trajectory in the coming months include the likely bumper Kharif harvest arrivals, raising prospects of a good rabi crop, and softer poultry demand on fears of avian flu.

Growth

The RBI’s survey points towards improvement in capacity utilization in the manufacturing sector to 63.3 percent in Quarter II:2020-21 from 47.3 percent in the preceding quarter. Consumer confidence is reviving, and business expectations of manufacturing, services, and infrastructure remain upbeat. The movement of goods and people and domestic trading activity is growing at a robust pace. Electricity and energy demand reflect a broader normalization of economic activity than in December, even as fears of the second wave abate.  RBI’s reserve money rose by 14.5 percent on January 29, 2021, led by currency demand. Money supply, on the other hand, grew by only 12.5 percent as of January 15, 2021.

Expert Committee on Primary (Urban) Co-operative Banks

The recent amendments to the Banking Regulation Act, 1949 have brought near parity in regulatory and supervisory powers between Primary (Urban) Co-operative Banks and commercial banks, including those related to governance, audit, and resolution. As such an Expert Committee (EC) will be constituted to provide a medium-term road map for strengthening the sector leveraging on the legislative amendments.

Remittances to IFSCs under the LRS

At present resident individuals are not allowed to make remittances under the Liberalised Remittance Scheme (LRS) to International Financial Service Centres (IFSCs). To further develop IFSCs and bring them at par with other international financial centers, it is proposed to permit resident individuals to make remittances to IFSCs for investment in securities issued by non-resident entities in IFSCs. For this specific purpose, resident individuals would be allowed to open a non-interest bearing Foreign Currency Account (FCA) in IFSCs.

Foreign Portfolio Investors (FPIs) Investment

To further promote investment by foreign portfolio investors (FPI) in corporate bonds, FPI investment in defaulted corporate bonds will be exempted from the short-term limit and the minimum residual maturity requirement under the Medium-Term Framework.

Retail Investors will be allowed to Open Gilt Accounts

As a major structural reform, it is proposed to provide retail investors with online access to the government securities market – both primary and secondary – directly through the Reserve Bank (‘Retail Direct’). This will broaden the investor base and provide retail investors with enhanced access to participate in the government securities market. This measure is expected to facilitate the smooth completion of the Government borrowing program in 2021-22.

Cheque Truncation System (CTS) clearing across all branches

The coverage of the Cheque Truncation System (CTS) was extended to all legacy clearing houses by September 2020. However, about 18,000 bank branches are still outside any formal clearing arrangement. As such it is proposed to bring all these branches under CTS clearing by September 2021. With this measure, all bank branches would be covered under the CTS and would enhance customer convenience.

24×7 Helpline for Digital Payment Services

With enhanced penetration and efficiency of digital payments, major payment system operators would be required to facilitate the setting-up of a centralized industry-wide 24×7 helpline for addressing customer queries in respect of various digital payment products and give information on available grievances redress mechanisms. Going forward, the facility of redress of customer grievances through the helpline shall be considered.