The Hindu Business Line : `CRR hike to hit bank profitability'

What they say
The hike would mean parting with another Rs 280 crore and drain Rs 3 crore of profit.
There will be a slowdown in credit growth, which is currently growing at 31 per cent, year-on-year.
Lending rates will go up and consumer loans are likely to take a hit.

Mumbai/Chennai , Dec. 9

The 50 basis point hike in cash reserve ratio (CRR) to 5.50 per cent by the RBI will impact banks' profitability, say bankers. CRR refers to the RBI holding back a percentage of bank deposits in cash for free to control liquidity in the system. The central bank's surprise move may put pressure on lending rates even as bankers are assessing the impact.

Right move

Given a choice between hiking the reverse-repo (banks parking free funds with the RBI) rate and the CRR, bankers agree the RBI has made the right move by marking up CRR. "The central bank has chosen the better option and it is now left to us to decide on an interest rate hike," said Mr V. Sridar, Chairman and Managing Director, UCO Bank.

The increase in CRR will, however, make a dent in profits, as banks do not earn interest on cash parked with the RBI. "UCO Bank will have to park an additional Rs 270 crore with the RBI and that could cut profit by Rs 15 crore," said Mr Sridar.

The Chairman of another public sector bank said the CRR hike would mean parting with another Rs 280 crore and drain Rs 3 crore of profit.

"The hike comes at a time when mobilisation of resources is getting difficult. But the impact on interest rates is yet to be ascertained," said the Chairman of a large public sector bank. Bankers acknowledge the strain on interest rates.

"We will probably raise our deposit and lending rates," said Mr Bhaskar Ghose, Managing Director and CEO, IndusInd Bank.

"There will be a slowdown in credit growth, which is currently growing at 31 per cent, year-on-year. Lending rates will go up and consumer loans are likely to take a hit," he added. Mr Ghose said deposit rates could rise by about 75-100 basis points and banks would have to look at new ways of garnering deposits. "We are comfortable with our lending rates and have no immediate plans to hike them. This year has already seen a 100 basis point (one percentage point) rise in lending rates," said Mr K. Ramakrishnan, Chairman and Managing Director, Andhra Bank.

"Our bank will have to commit about Rs 300 crore extra on account of this requirement. That will impact our profits by about Rs 2.5 crore this year."

According to Mr T.S. Narayanasami, Chairman and Managing Director, Indian Overseas Bank, "Our bank will have to maintain another Rs 350 crore without interest. That would cost us something in the region of about Rs 1.25 crore a month." He termed the CRR hike as an inevitable corrective measure in the light of inflationary pressures.

He expressed concern about the impact on the debt market. "If the inflow of funds dries up, yields may move up and that will affect our treasury portfolio," he said.

Dr K.C. Chakrabarti, CMD, Indian Bank, said that his bank would have to maintain about Rs 200 crore of extra CRR based on the new requirement.

He said, "The RBI is signalling all players should behave responsibly. All of us have to re-examine our lending habits." Mr M.B.N. Rao, CMD, Canara Bank, said, "Given that money supply has been growing at over 19 per cent and inflation also higher than earlier, and credit growth continuing at 30 per cent plus for nearly three years now, they had to take this step. Some of the surplus liquidity will now be sucked out. The RBI wants us to direct lending towards more productive sectors of the economy."

Treasury officials fear a sharp rise in yields when it opens on Monday.

"The bond market is likely to react adversely. Bond prices may fall and the 10 year yield could harden by as much as 20-25 basis points," said Mr P. Mukherjee, senior Vice-President, Treasury, UTI Bank.

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