RBI waives off CRR for Banks and introduces LTRO

The Reserve Bank of India (RBI) has waived off the cash reserve ratio (CRR) for banks for a limited period with a view to improving credit flow to the housing and auto sectors as well as small businesses. It has also introduced long-term repo operations (LTRO) of one- and three-year tenures to enhance liquidity, credit growth and transmission of policy rates to customers.

The CRR waiver will ensure that banks have more money to lend to retail borrowers which may lead to softening of interest rates for new borrowers who take repo-linked loans as well as old borrowers repaying loans based on Marginal Cost of funds-based Lending Rates (MCLR).

Whenever the RBI decides to increase CRR, the amount available with the banks for loan disbursal comes down and vice-versa. With the RBI announcing the relaxation of CRR requirements and that new retail and MSME loans disbursed till 31 July 2020 will be adjusted against a bank’s CRR requirements while ensuring that banks meet at least 90% of the requirement, the banks would be able to monetize more of their liquidity while ensuring that greater financing is available for home and car buyers as well as for Micro, Small and Medium Enterprises (MSMEs).