Banks set to gain almost Rs 10,000 cr from CRR cuts

[sajiv]

Mumbai: Commercial banks would gain nearly Rs 10,000 crore in a year from the 350 basis points reduction in cash reserve ratio (CRR) alone. This will remain in banks' vaults — unless they reduce the rates further — as the quantum of relief passed on by commercial banks to their customers is yet to match the reductions in key rates and ratios (like CRR) by the Reserve Bank of India (RBI).

The RBI had reduced CRR (portion of bank deposits to be kept with the RBI) from 9 per cent to 5.5 per cent in three stages, releasing Rs 140,000 crore to the banking system in October and November. CRR money kept with the RBI doesn't get any interest from the RBI. After the enactment of the Reserve Bank of India (Amendment) Act 2006, the RBI has been exempted from paying interest on any portion of the CRR balances.

"Once this money is out of CRR purview, banks can deploy it whereever they want. Banks have been deploying this money in Government bonds. Banks can get Rs 10,000 crore if they put the entire Rs 1.40 lakh crore in bonds. The return will double to Rs 20,000 crore if they lend the money at the current PLR level," said a banking source. The reduction in repo rate is additional bonanza. In short, any delay in passing on the benefits will fatten the banks' kitty.

Bonds could give a return of 6-7 per cent. And that's cool money that banks can get without undergoing the hassles asscoiated with extending credit to customers — that too at a time when credit profiles of major borrowers have been weakening. Even if they lend at the prime lending rate, they could get 13.25 per cent now — which is even bigger money and much better than not earning anything by parking it as CRR money with the RBI.

"With the deposit base remaining largely unchanged and the 350 bps cash reserve ratio cut coming into effect, free funds with banks have continued to increase and are now back at February levels after a sharp fall in October. Banks have excess liquidity which they are parking in the reverse repo window and in government bonds," according to Tushar Poddar and Pranjul Bhandari of Goldman Sachs.

There's no wonder banks' investments in government securities which come under the purview of statutory liquidity ratio (SLR) — portion of deposits to be invested in govt securities — have been rising. Significantly, though the RBI has reduced the SLR requirements of banks from 25 per cent to 24 per cent, banks' holding in SLR securities have been much above this figure at 30 per cent. As much as Rs 10,78,954 crore of bank money is stuck in SLR securities — which is nearly Rs 3,00,000 crore more than the requirement.