Interest on CRRs to be restored: FM

The Reserve Bank of India may review its decision to stop payment of interest on banks' cash reserve ratio (CRR) balances kept with the central bank.

Finance Minister P Chidambaram today reportedly assured public sector bank chiefs in a closed-door meeting that the restoration of the practice of paying interest on CRR balances would need to be looked into.

Apart from the CEOs of public sector banks and banking division bureaucrats, RBI Deputy Governor Usha Thorat was also present at the meeting.

Accrual of 3.5 per cent interest on banks' CRR balances in excess of 3 per cent of net demand and time liabilities (NDTL) stopped after an amendment to the Reserve Bank of India (RBI) Act came into effect last month.

Banks are currently required to maintain 5 per cent of their NDTL as CRR. This means, they no longer earn interest on 2 per cent CRR kept with the RBI.

The CEOs of a few banks who attended the meeting told Business Standard there could be another amendment to the RBI Act to restore the interest on CRR. The previous amendment had abolished the 3-per cent floor on CRR as well as the interest payment on it.

If the interest payment is restored, banks will have a windfall of Rs 1,600 crore. In 2005-06, public sector banks reported an aggregate net profit of Rs 26,272 crore.

Chidambaram met PSB chiefs in New Delhi today to review the performance of government-owned banks in 2005-06. The finance minister reportedly admitted that the pace of credit growth might not be sustained, but banks must continue to lend to productive sectors.

The PSB chiefs told the finance minister that the banks' profitability in 2006-07 would be under pressure in the backdrop of depreciation in their investment portfolios because of rising yields on bonds.

"The finance minister acknowledged that banks were under pressure, but asked them to focus on improving performance even in adverse market conditions," a chairman of a mid-sized PSB said.