The Hindu Business Line : Banks may take a hit of Rs 40 cr on CRR changes

Banking sources said here that the fall in earnings could be anywhere between Rs 15 crore and Rs 40 crore on account of the reduction in the interest rate on cash balances maintained under the cash reserve ratio (CRR) with the Reserve Bank of India.

The interest rate on CRR balances was reduced to 3.5 per cent from 6 per cent along with the hike in the CRR balances to 4.75 per cent of the net demand and time liabilities.

The fall in this source of income comes even as the depreciation provisions for securities marked to market mounted considerably. As a result, net earnings of the banking sector are expected to come under pressure, unless offset by an increase in credit off-take, the sources added.

The sources said that the reduction in CRR rates along with the higher CRR requirement was a major factor driving yields northwards.

Ten-year yields are now in the region of about 6.65 per cent. Bankers expect yields to test the 7 per cent level before the end of the year.

The hardening trend was evident from the rising yields at the Treasury Bill auctions. At the auctions on Wednesday last, the yields were 5.08 per cent. This would mean a spread of over 50 basis points over the reverse repo rate. This was a complete reversal of the trend that prevailed before April this year, when T-bill yields were at a discount to the repo rate.

The reverse repo rate is the rate at which the RBI sells securities for mopping up excess liquidity.

Bankers said the reduction in the rate was prompting some of the banks to begin hiking their effective lending rates.

No overt hike in lending rates has so far taken place nor are any of the banks planning to tweak the present prime lending rates ruling between 10.5 and 12 per cent. The change is in the discounts to the PLR.