The Hindu Business Line : CRR hike: Deposit rates may take a hit

Mumbai, July 31 Banks may look at cutting their deposit rates following the 50 basis points hike in Cash Reserve Ratio. Bank of Baroda and Bank of India have already reduced their deposit rates following the First Quarter Review of the Annual Policy Statement on Monetary Policy 2007-08.

The two banks have reduced their rates on one-year deposit to 9 per cent (9.5 per cent).

“We are not touching our lending rates. An additional Rs 520 crore has to be parked due to hike in CRR and the profit will be hit by Rs 40 crore,” said Mr Anil K. Khandelwal, Chairman and Managing Director, Bank of Baroda.

Bankers expect about Rs 16,000 crore to be sucked out from the banking system due to the hike in CRR. They estimate that Rs 1,000 crore of profit for the banking industry in 2007-08 would be erased.

CRR refers to the RBI holding back a percentage of bank deposits in cash to control liquidity in the system.

“With the hike in CRR, the cost of funds will go up by seven to eight basis points. We may have to park an additional amount of Rs 2,500 crore-Rs 3,000 crore. We will take a look at the deposit rates at the Asset-Liability Committee meeting sometime later,” said Mr O.P. Bhatt, Chairman, State Bank of India.

“CRR hike will not impact liquidity much but will put a pressure on interest rates. Improving margins may not be possible but maintaining it is possible,” he said.

SBI’s cost of deposits had risen to 5.35 per cent in the first quarter ended June 30, 2007 against 4.63 per cent in the corresponding quarter last year.

Normally, a CRR hike is followed by a rise in lending rates. However, due to excess liquidity in the system, banks will not look at increasingtheir lending rates, said banking analysts.

ICICI Bank said it has not yet taken a call on its deposit and lending rates. “We have to wait and watch where the interest rates are headed. As of now, the liquidity is comfortable but with the CRR hike, liquidity will be sucked out of the banking system. So, there may be some impact on the liquidity. But the capital inflows have been quite strong. We have to watch the capital inflows and also assess the liquidity,” said Ms Vishakha Mulye, Chief Financial Officer, ICICI Ban k.

Some days ago, Corporation Bank withdrew its special deposit scheme, offering a deposit rate of 9.75 per cent. “Interest rates may not soften immediately. The cost of funds for banks may rise. Corporation Bank needs to park an additional amount of about Rs 200 crore due to the hike in CRR,” Mr B. Sambamurthy, Chairman and Managing Director, Corporation Bank.

According to Mr Bhaskar Ghose, Managing Director and CEO, IndusInd Bank, “The benefit enjoyed by the banks to encash lower call money rate is gone. There will be a slight dent in the net interest income (as banks will earn zer o per cent on additional 0.5 per cent CRR).

Some bankers feel that CRR hike may not translate into any immediate impact on deposit and lending rates.

Mr Neeraj Swaroop

“The CRR hike is unlikely to have any immediate impact on either deposit or lending rates, though there is a need to take a wait and watch approach to assess how the demand-supply situation pans out,” said Mr Neeraj Swaroop, CEO-India, Standard Chartered Bank on the Credit Policy.

But do bankers expect the RBI to further hike the CRR?

“Going forward, the RBI could be forced to use the CRR again, if it has to intervene heavily in the currency market, on the back of rising capital inflows. However, with four such hikes now since December and restoration of LAF as the primary tool of liquidity management, the probability of further hikes has decreased,” said Mr Romesh Sobti, Country Head-India ABN Amro Bank.

Related Stories:
UBI cuts home loan rates
SBI may cut rates on deposits
IOB raises rates on NRE deposits

More Stories on : CRR & Bank Rates | Credit Policy | Fixed Deposits

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