MUMBAI, Dec 2: The Reserve Bank of India move to free the non-resident external (NRE) rupee and non-resident non-repatriable (NRNR) account funds from CRR requirement is likely to energise banks into stepping up their non-resident deposit mobilisation drive.

RBI deputy governor Y V Reddy said that the rationale for exempting NRE, NRNR accounts from the CRR is to provide an incentive for banks to mobilise non-resident Indian (NRI) rupee deposits more actively. "The removal of CRR will have an impact on the profitability of the banks and consequently it will work as an incentive for the banks to mobilise more NRI funds," Reddy said at today's RBI press conference.

On why CRR on foreign currency non-resident FCNR (B) account funds were not removed, Reddy said that under FCNR (B), banks have the freedom to hold back the funds in foreign currency, while under NRE and NRNR scheme, the funds have to be brought in and the need of the hour is to bring in more foreign exchange funds into the country.

RBI on Tuesday announced the removal of the 10 per cent incremental CRR on non-resident deposits under NRE and NRNR deposit schemes with effect from the next fortnight. Incremental CRR on all NRI deposit schemes was introduced only in April 1997 at the time of the slack season credit policy. Earlier, CRR had to be kept on these deposits as part of the general net demand and time liability.

The banks had benefitted then as they were freed from keeping CRR on their entire NRI deposit corpus, which for all banks stood at $20 billion as on March 31, 1997. The net incremental NRI deposits for 1996-97 was $3.4 billion out of which NRNR accounted for $2.2 billion, NRE accounted for $1.3 billion and FCNR(B) accounted for $1.7 billion. There was a negative outflow of $1.9 billion on FCNR(A) account.

According to officials of leading public sector banks, NRI deposits under the rupee-denominated NRE and NRNR have been steadily increasing in any case. Now the banks will have an extra incentive to garner more deposits under this head.

The other major source of NRI deposits, FCNR(B) account, however, had been languishing at almost the same levels since the beginning of this fiscal. "There has not been any increase, but rather a slight decrease in FCNR(B) deposits of late. It has been primarily due to the fact that interest rate on similiar deposits abroad is higher than the FCNR deposit rates," said the official of a leading public sector bank.

On the contrary, bankers agreed that the share of NRE and NRNR account had been steadily going up. They attribute high deposit rates offered on NRE and NRNR account compared to similiar tenure domestic deposits and the loyalty factor as the main reason for this trend.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.