The Hindu Business Line : Little choice but to pass on CRR hike: Bankers

The alternatives
Banks can factor in the cost increase on to credit, investments or to deposits.
Passing on the costs to investments would imply an increase in yields.
Banks have already passed on the costs to short-term investments.

C. Shivkumar

Bangalore, Feb. 5

Banks are expected to pass on the impact of the Cash Reserve Ratio (CRR) on to interest rates but will probably wait for a pick up in credit offtake.

Top bankers said there was little alternative to passing on the hike in rates, since the CRR hike effected on January 28 would directly impact their net interest margins.

CRR is a zero interest balance that banks maintain with the RBI against their net demand and time liabilities.

The two-phase hike to 5.75 per cent targets impounding Rs 36,000 crore of liquidity from the banking system.

Banks can factor in the cost increase on to credit, investments or to deposits.

Passing on the costs to investments would imply an increase in yields. At this juncture, such a step was not possible since the Government had already completed the bulk of its targeted borrowing programme for the current fiscal.

The Government has so far raised about Rs 4.1 lakh crore against the target of Rs 4.51 lakh crore.

But, banks have already passed on the costs to short-term investments. This was evident from the yields at Wednesday's Treasury Bill auctions. The cut-off and weighted yields at the 91-day T-Bill auctions were 4.09 per cent and 4.05 per cent for the first time since April 2008 this fiscal year.

Passing through of the costs also reflected at Tuesday's State Development Loan (SDL) auctions, where the weighted average yields were 8.33 per cent or a spread of 80 basis points over the 10-year benchmark sovereign security.

Deposit rates

Banks, particularly PSU banks, have ruled out the option of pushing down deposit rates now.

Bankers said that this would lead to an exit of long-term deposits from the banking system. Besides, bankers said they anticipated a big credit pick up in the next financial year when some big ticket infrastructure projects were expected to begin drawing down on their sanctioned loans.

Passing on the cost increases to loans though posed a challenge given the current credit offtake situation. Incremental credit-deposit ratio this year so far was 56 per cent, down from the corresponding year's figure of 65 per cent.

Although there were some incipient signs of a credit pick-up, bankers admitted that they were mostly short-term teaser loans. Such advances were made for short durations, for as low as three weeks.

Some banks had recently offered retail advances at low initial rates and subsequently scaling up the rates from the third year onwards. As for corporate term loans, some of the large public sector banks have already reduced discount to the benchmark prime lending rates since the beginning of this week on corporate advances.

The discounts were just 50 basis points below the prevailing benchmark prime lending rates. At the beginning of this year, the discounts were as high as 150 basis points.

More Stories on : Banking | CRR & Bank Rates

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Prospects brighten for bumper wheat crop

Snow, rain forecast over western Himalayan region

Govt to bring down fiscal deficit gradually

PM reaffirms commitment to sustainable development

Rupee slips against strong $

NTPC issue subscribed fully; retail response tepid

GE-Hitachi eyes Gujarat site for n-plant

PSU insurers booking profits in Dunlop

Parikh report: Petrol car sales may get boost

ESOPs out, tenure-linked bonuses in

Church of England exits Vedanta over ‘ethics'

Little choice but to pass on CRR hike: Bankers

Markets this week

Sensex falls to 3-month low on US job data