The cut in Cash Reserve Ratio by the Reserve Bank of India will go a long way in easing the liquidity deficit in the banking system, said bankers. The move will inject around Rs 48,000 crore into the system.
The quantum of the cut — 75 basis points — was a pleasant surprise for the markets, which was expecting a 50 basis points reduction.
Much-needed relief
The CRR cut will give banks a much-needed relief given that the outflow from the system on account of advance tax payments by companies next week is likely to be in the range of Rs 40,000-60,000 crore.
Also, credit demand is likely to see a pick up in the last fortnight of the financial year. This, too, would add to the liquidity pressure.
According to Mr M. D. Mallya , Chairman, Indian Banks' Association, and Chairman and Managing Director, Bank of Baroda, the cut is a good initiative on the part of the RBI and will provide relief on the liquidity front.
In the last 15-20 days there have been some signs of credit pick-up, though not very substantial. More importantly, there has been an increase in the flow of loan proposals. This is an indication of a positive environment, Mr Mallya said.
Ms Chanda Kochhar , Managing Director and CEO, ICICI Bank, said: “The CRR cut is a proactive step by the RBI to inject permanent liquidity into the system. This is expected to bring down the high level of overnight borrowings by banks from RBI. This would also ensure continued smooth flow of credit in the corporate and retail sector.”
Mr S. Raman , CMD, Canara Bank, said the move could inject Rs 2,500 crore for the bank. On lending rate reduction, he said it would depend on “how the deposit rates behave going forward”. A lot also depends on the Credit Policy on March 15, he added.
“The injection of funds into the system will reduce the cost of borrowing for banks. The reduced cost of borrowing would add to our bottomline,” said Mr T. M. Bhasin , Chairman and Managing Director, Indian Bank.
With demand for funds increasing from all sectors, the additional funds would increase banks' lending capacity. For Indian Bank, the CRR cut would add Rs 900-crore lending capacity immediately.
Mr M. Narendra , Chairman and Managing Director, Indian Overseas Bank, said that short term retail deposit rates will hold steady. Borrowers may have to wait till April for lending rates to thaw. The three-month CD rates, which are hovering around 11.25 per cent, will ease by 75-100 basis points.
According to Ms Shubhalakshmi Panse , Executive Director, Vijaya Bank, though the pressure has eased now, the situation will be back to what it was once the advance tax payments go out of the system on March 15. About Rs 638 crore would get injected into Vijaya Bank, post the CRR cut, she added.
“Looking at the liquidity position for the past weeks, the reduction in CRR has come at the right time,” said Mr M. Bhagavantha Rao , Managing Director, State Bank of Hyderabad.
Mr Shiv Kumar , Managing Director, Stata Bank of Bikaner and Jaipur, said banks might need more liquidity. “More steps are needed. There could be some more measures like cut in Statutory Liquidity Ratio in the policy review on March 15,” he said.
Karnataka Bank Ltd has said that RBI's move will help ease liquidity situation in the system.
Mr P. Jayarama Bhat , MD, Karnataka Bank, said that following the cut in CRR, banks could start sanctioning credit proposals, some of which were held up due to the tight liquidity conditions.
Asked if the bank will reduce interest rates for its borrowers, Mr Bhat said: “We will not meddle with interest rates now.”
Mr Ajai Kumar , CMD, Corporation Bank, said, “As far as our bank is concerned we would have around Rs 1,000 crore as liquidity cushion with this rate cut”.
About a likely reduction in interest rates, he said it is too early to make a comment as margins are under pressure and the overall liquidity remains a concern till March-end.
Mr M. C. Jacob , Chief General Manager, State Bank of Travancore, said that while the cut in CRR was badly needed, given the tight liquidity, the RBI would have to be even more accommodative in its mid-quarter review of the monetary policy, next week.
Dr N. Kamakodi , Managing Director, City Union Bank, said that the CRR cut was a welcome sign, although the bank has been managing pretty well without too much borrowing.
Mr V. P. Iswardas , Managing Director, Catholic Syrian Bank, termed the 75 bps cut as a pleasant surprise and would give a ‘good breather' to banks.