Business Daily from THE HINDU group of publications
Saturday, Jun 24, 2006
Business Daily from THE HINDU group of publications Saturday, Jun 24, 2006 |
|
|
|
|
|
|
|
|
Home Page
-
Financial Policy Money & Banking - Public Sector Banks Scrapping interest on CRR balance may hit banks Our Bureau
RBI move RBI decision follows recent amendments to the RBI Act Large banks like State Bank of India and Punjab National Bank will take a bigger hit The move is likely to be a disincentive for deposit mobilisation
Mumbai , June 23 Starting the fortnight beginning June 24, commercial banks will lose out a source of earning additional income, which they have been availing themselves of from September 2004. The Reserve Bank of India will no longer pay banks interest on the balance of Cash Reserves (CRR) maintained by them with the central bank. Hitherto, RBI has been paying 3.5 per cent interest on CRR balances above the statutory three per cent up to the prescribed level of five per cent. The RBI decision to discontinue the interest payment on CRR balance is expected to have its impact on the banks' bottom lines in the current fiscal. Banking analysts expect an average 2-2.5 per cent drop in profits before tax on this account in the case of most banks. "This move will hurt the profitability of banks as CRR is now a non-earning asset for banks. It will be idle cash," said a bank official. Analysts estimate that though the proportion of the impact would be the same, large banks like State Bank of India and Punjab National Bank will take a bigger hit in absolute terms, because of the size of their net time and demand liabilities. "This will reduce the yields for banks. It is a negative impact for the banking industry, though the proportion for the entire system is small," said a banking analyst. While most bank officials are baffled by the central bank's move, some see it as yet another measure towards curbing inflationary pressures. "Perhaps the central bank feels that with one more source of income for banks drying up, they will have less money to lend. In course of time the central bank may even raise CRR rates," said a senior official with a public sector bank. "This hard step by RBI may discourage banks from raising deposits as cost of funds will increase. With this new guideline, if banks raise more deposits, they will have to maintain more reserves with RBI," said another bank official. Therefore, the move is likely to be a disincentive for deposit mobilisation, which is already one of the big challenges facing banks in 2006-07. "Funds are being diverted to real estate and equities market. The interest rates we offer cannot compete against the returns from these sectors," said a bank official. The RBI decision follows the recent amendments to the RBI Act, which enables RBI to decide on the quantum of CRR to be maintained by banks. Before the enactment of this amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could prescribe CRR for scheduled banks between three per cent and 20 per cent of total of their demand and time liabilities. Banks hitherto have been required to maintain minimum CRR balances of 3.0 per cent of their net demand and time liabilities (NDTL) as on the reporting Friday of the second preceding fortnight, on a daily basis, subject to the average maintenance of 5.0 per cent of NDTL during the fortnight.
Related Stories: More Stories on : Financial Policy | Public Sector Banks | RBI & Other Central Banks
Article E-Mail :: Comment :: Syndication :: Printer Friendly Page
|
Stories in this Section |
|
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2006, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line
|
