The banking industry can save around ₹7,400 crore — assuming credit growth of 9 per cent for housing and 5 per cent for vehicle and MSME loans — as cash reserve ratio (CRR) benefits following the limited reprieve from CRR maintenance given recently by the RBI to incentivise credit flow to specific sectors, according to State Bank of India’s research report, Ecowrap .
CRR is the slice of deposits that banks have to mandatorily park with the RBI. Currently, it is at 4 per cent. Banks don’t earn any interest on their CRR balances with the RBI.
The RBI has allowed banks to deduct the equivalent of incremental credit disbursed by them as retail loans for automobiles, residential housing and MSMEs, over and above the outstanding level of credit to these segments as at the end of the fortnight ended January 31, 2020, from their deposits for maintenance of CRR. This exemption is available for incremental credit extended up to the fortnight ending July 31, 2020.
Per the estimation of SBI’s economic research department, using January 2020 sectoral data, the banking industry, till July 31, 2020, will be lending ₹1.85-lakh crore in specified sectors and can save around ₹7,400 crore as CRR benefits. The capital charge on the ₹1.85-lakh crore would be around ₹15,000 crore.
Impact on profitability
“This ₹7,400 crore will have an impact on banks’ profitability and cost of deposits. We believe that banks’ profitability will increase by ₹480 crore (@6.5 per cent Government Security yield). Cost of deposits may also be impacted by 2-3 bps,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI. Calling it “an excellent step”, Ghosh said that if the RBI extends it to December 31, it could have a larger impact on the banking sector, as the second half is more productive in lending due to the festival season.
The alternative, he suggested, is to provide for a clear uniform CRR cut (linked to an outcome, say, refinancing scheme) on an aggregate basis. “This will remove the complexities currently involved in CRR computation. However, in the ultimate analysis, the supply of credit will be purely determined by demand for credit. To such extent, these steps are more a signalling device by the RBI to ensure markets are not perturbed by any negative news of liquidity deficit or otherwise as had happened in the past,” he added.
LTRO benefits
The RBI’s Long-Term Repo Operation (LTRO) will facilitate banks to undertake maturity transformation smoothly and seamlessly so as to augment credit flows to productive sectors, as it provides durable liquidity and will substitute frictional liquidity in banking system, the report further said.
“Such LTRO will provide a clear timeline as to when money will flow but the impact on banks’ costs of funds (up to 1-2 basis points/₹1-lakh crore on a deposit base of ₹130-lakh crore) is minimal unless augmented by larger LTROs. LTRO has also no negative carry on cost of fund because of no CRR requirement,” said Ghosh.
The RBI has started conducting LTRO (to provide long-term liquidity) of one-year and three-year tenors at the policy repo rate since last month to facilitate the transmission of monetary policy actions and flow of credit to the economy.
Ghosh observed that the efficacy of the CRR, an instrument of active liquidity management, in a modern financial system, is limited unless carried out on a larger scale. “It is expensive to administer frequent changes in reserve requirements and ‘using reserve requirements to finetune the money supply is like trying to use a jack-hammer to cut a diamond’ [Mishkin 1997],” he said.