Mumbai, Feb. 23: The Reserve Bank of India (RBI) has decided to reinstate payment of interest on cash reserve ratio (CRR) balances that are maintained by banks with it. This comes as a major relief to commercial banks as it will help shore up their income.

Banks have been demanding that RBI pays interest on the funds parked under the requirements of cash reserve ratio that has now been increased to 6 per cent of their deposits.

Last year, the central bank had decided not to pay any interest on the eligible CRR balances maintained by scheduled banks with effect from the fortnight beginning June 24, 2006.

The move hit the banks as they lost over Rs 1,000 crore as interest income. CRR is that portion of deposits which banks have to maintain with the RBI.

Recently, the RBI revised upwards the CRR by 50 basis points to 6 per cent.

Earlier, the central bank was paying 3.5 per cent interest to the banks on 2 per cent of the CRR balances.

With deposits in banks rising and the RBI simultaneously raising CRR twice in a short span of time, banks have been urging the Centre and the Reserve Bank to do away with the policy of not paying interest on CRR balances maintained by them.

The RBI today said banks would be paid interest on the eligible CRR balances as the government has not yet notified the relevant section.

It would pay interest at the rate of 3.5 per cent for the June 24, 2006 to December 8, 2006 period, at 2 per cent for the period from December 9, 2006 to February 16, 2007 and 1 per cent from February 17, 2007 till further notice.