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THE Reserve Bank of India is still waiting to be empowered to change cash reserve ratio (CRR) rates despite an amendment in the RBI Act.

The government has stopped short of notifying an amendment in the RBI Act that empowers the regulator to fix the floor for the CRR — the mandated balances held by banks with the regulator. This also implies that banks will begin earning interest on their CRR balances from RBI, which had been stopped following the amendment to the Act.

Though the RBI Act was amended in Parliament in June last year, the government has decided against notifying this amendment of Section 42, since it feels RBI has enough flexibility to prescribe CRR within the original band of 3-20%. However, differences remain between RBI and the government over the interpretation of the provision, Section 42 1(B). RBI has held that it is not liable to pay interest to banks.
“RBI already has enough flexibility to use CRR as a tool as it has in the recent past. It is nowhere near the lower limit of 3%. Should the level be reached anytime in future, the government will consider notifying the Act then,” a government official said.

Since the government has withheld the notification of the amendment, the floor level of banks’ CRR, which was kept at 3%, has been restored. Banks are required to keep 5.5% of their net demand and time liabilities (NDTL) with RBI in the form of CRR.
The government has notified other amendments in the RBI Act, except Section 42, which deals with CRR. RBI must now resume paying interest on CRR balances, since this is prescribed in Section 42 (1B) of the Act.

The government has taken a view that legally, RBI should resume paying interest on the balances, though the Act does not spell out categorically the regulator must pay interest.

Banks do not earn interest on the entire cash balance, and RBI had been paying 3.5% interest on cash balance above 3% and up to 5% — known as eligible cash balances — at an interest rate determined by the central bank with effect from September 18, 2004.

It is estimated that Rs 1,600 crore as a result of nonpayment of interest is nearly 6% of the banks’ profits. The public sector banking industry registered a net profit of Rs 26,272.48 crore in 2005-06.

Parliament had approved the amendments to the RBI Act, to give greater operational flexibility to the regulator in the conduct of monetary policy. Last month, the regulator brought in an ordinance amending the Banking Regulation Act, enabling RBI to fix the floor of the statutory liquidity ratio.

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