Date:24/02/2007 URL: http://www.thehindu.com/2007/02/24/stories/2007022405941900.htm

Business

RBI to pay interest on cash reserves to banks

Interest payment for three periods specified

MUMBAI: The Reserve Bank of India on Friday decided to pay interest to all commercial banks on the cash reserve parked with the central bank, a key decision that will help shore up the income of banks.

Banks' demand met

Banks have been demanding that the RBI pay interest on the funds parked under the requirements of the Cash Reserve Ratio (CRR) that has now been increased to six per cent of their net demand and time liabilities.

The apex bank said it would pay interest to banks on the eligible balance of CRR at the rate of 3.5 per cent for the period between June 24 and December 8, 2006, and at 2 per cent for the period between December 9, 2006, and February 16, 2007.

For the period beginning February 17, 2007, until further notice, the RBI will pay an interest of one per cent.

This decision has been taken in consultation with the Government, the apex bank said in a release here.

The RBI Act was amended and notified on January 9 this year barring Sec. 3 of the amended Act which provides for lifting of CRR floor and ceiling limits and the withdrawal of interest payment for CRR above the floor rate of 3 per cent.

Accordingly, the RBI on Friday announced interest payment on eligible CRR balance as per the rates mentioned for three periods between June 24, 2006, and February 17 and beyond.

The decision will benefit all banks as many of them had started feeling the pinch of the recent decision by the central bank to increase the CRR to 6 per cent after similar hikes in December 2006 and January this year to absorb excess liquidity from the banking system in a bid to prevent overheating and contain inflation.

Directive to NBFCs

The RBI asked systemically important non-deposit taking non-banking finance companies (NBFCs) to scrutinise their exposure to large borrowers for purchase of foodgrains to detect any possible hoarding by such entities.

Acting on concerns that some of the corporates or entities may be hoarding foodgrains by taking the benefit of NBFC finance, the RBI asked all NBFCs with asset size of Rs. 100 crore and above to scrutinise and confirm to themselves that funds have not been diverted for the purpose of hoarding.

The RBI asked the NBFCs to submit a comprehensive report on the matter by March 10. — PTI