Mumbai:The Reserve Bank today permitted banks to include now defunct Rs 500 and 1,000 notes as part of their cash balance, a move that may provide relief to banks.

In the wake of deposits of Specified Bank Notes (SBNs) in massive quantity, it has been decided that SBNs deposited in the currency chests since November 10 will be considered as part of the chest balance in the soiled note category, RBI said in a notification.

However, such deposits will not be reckoned for calculating chest balance limit or Cash Holding Limit, it said.

The notification further said RBI will review the decision in the second half of February.

According to analysts, the move will help banks adhere to RBI’s sharp hike in CRR announced last week.

In a surprise move on November 26, RBI raised the cash reserve ratio (CRR) of banks to 100 per cent of total deposits.

The higher CRR is applicable on incremental deposits raised between September 16 and November 11, 2016. That would mean deposits of Rs 3.2 lakh crore that accrued to banks during this period will be impounded by RBI.

RBI’s CRR move to put monthly burden of Rs 1,050 crore on banks

Mumbai: Reserve Bank’s move for banks to maintain excess cash reserve ratio (CRR) requirement is likely to put an additional burden of Rs 1,050 crore on a monthly basis on the banking system, says a report.

“Excess CRR requirement will additionally cost the banking system Rs 1,050 crore on a monthly basis,” India Ratings and Research said in a note here today.

In order to absorb surplus liquidity accrued by banks, RBI last week asked banks to maintain 100 per cent of the deposits (NDTL) accrued between September 16 and November 11 as incremental CRR balance with it.

RBI, however, said it was a purely temporary measure.

According to experts the move is likely to result into over Rs 3 trillion outflow from the banks.

The rating agency said the relief from RBI on CRR would come in a staggered manner, as relieving this high quantum of liquidly all at once will come with challenges.

“Normalisation of the CRR requirement will be gradual and staggered as the RBI may exercise caution before releasing the mopped up Rs 3 trillion to banks,” the note said.

It said the persistence of the surplus liquidity conditions will lead the RBI to evaluate alternatives available for liquidity sterilisation.

The agency continues to believe cash management bills can effectively manage the liquidity owing to their short tenor and consistency with the monetary policy stance.

It said the decision to mop up excess liquidity will ensure a floor is put on bond yields.

The agency also expects banks to be more proactive in bringing down their term deposit rates as the increase in CRR requirement creates a drag on the short-term profitability of banks.

The move, which is temporary in nature, does not impair the longer term profitability of banks, but induces a larger negative carry on CRR in the computation of the marginal cost-based lending rate (MCLR).

The offsetting impact of a larger negative carry on CRR compared with cheaper deposits would restrict any significant downward movement of MCLR, hampering smooth monetary transmission, it said.

PTI

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