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

News:RBI has exempted banks from maintaining cash reserve ratio(CRR) for loans to retail and micro, small and medium enterprises for five years if these loans are extended between January 31 and July 31,2020.

Facts:

About CRR:

• The Cash Reserve Ratio refers to a certain percentage of total deposits the commercial banks are required to maintain in the form of cash reserve with the central bank.
• The cash reserve is either stored in the bank’s vault or is sent to the RBI. Banks do not get any interest on the money that is with the RBI under the CRR requirements.
• The CRR in India is decided by RBI’s Monetary Policy Committee in the periodic Monetary and Credit Policy.At present, CRR is 4% of net demand and time liabilities.

Significance of CRR:

• Since a part of the bank’s deposits is with the Reserve Bank of India,it ensures the security of the amount.It makes it readily available when customers want their deposits back.
• CRR also helps in keeping inflation under control.At the time of high inflation in the economy,the RBI increases the CRR so that banks need to keep more money in reserves so that they have less money to lend further.