CRR-exempt loans: Deduction only on incremental lending, clarifies RBI

Following some banks seeking clarity on the computation of CRR to be exempted for incremental lending to three specified retail loans, the Reserve Bank has said that the deduction is available only on the equivalent incremental credit to these segments.

In its bid to boost retail credit flow, the RBI on February 6 announced that incremental loans towards automobile purchases, residential housing and loans to MSMEs will be set against the mandatory cash reserve ratio (CRR), which is parked with the RBI on a permanent basis and on which banks earn no interest.

This means that for any fresh loan to these three segments, the banks need not set aside the mandatory 4 per cent of deposits as CRR.

Subsequently on February 10, the RBI had clarified that the CRR exemption will be for five years from the date of the origination of the loan or the tenure of the loan, whichever is earlier, and that the incremental credit to these segment can be deduction from their NDTL for six months beginning with the fortnight beginning January 31, 2020 and ending the fortnight to July 31, 2020.

"It is clarified that the CRR exemption is available only on equivalent incremental credit to the three identified segments and its computation is based on the difference between the outstanding credit to these segments as of January 31, 2020 and the subsequent fortnights up to July 31, 2020," the RBI said in a clarification.

On computing the equivalent amount of incremental credit that can be deducted/exempted from CRR, the regulator said it can be done on every reporting Friday beginning February 14, 2020 and up to the reporting Friday ending July 31, 2020 and thus be deducted from the outstanding credit to the respective segments as on January 31, 2020.

"If the difference between the outstanding credit is positive, the equivalent amount of difference be deducted from NDTL for the purpose of CRR maintenance. If the difference in credit to any of the specified segment is negative, it should be ignored. The incremental credit will be calculated segment-wise," RBI said.

The RBI also said the incremental loans to the factoring units of MSMEs discounted under the trade receivables discounting system (TReDs) are also eligible for CRR exemption.

On how long such deductions/exemptions are allowed, the RBI said the amount of incremental credit as of July 31, 2020 (over the outstanding credit as of January 31, 2020) will be reduced to the extent of repayments and NPAs and the net amount of incremental credit will be eligible for deduction from NDTL for up to five years--up to the fortnight ending January 24, 2025, or the tenure of the loan, whichever is earlier.