The Hindu Business Line : CRR hike expected, margins may be hit, say bankers

April 17 Reacting to the 50 basis point increase in the Cash Reserve Ratio, bankers said that given the inflationary spiral, the move by the Reserve Bank of India was quite expected. Perhaps the timing was a bit of a surprise. They expressed apprehensions that the move would affect their margins to some extent and they may be forced to pass on the cost to the customers. However, they would wait for the Credit Policy statement due on April 29 before taking a decision on increasing lending rates.

Dr K. Ramakrishnan, Chairman and Managing Director, Andhra Bank, said the profitability of banks will take a hit in the current financial year (2008-09) due to the CRR hike. As far as Andhra Bank is concerned, we will have to set aside Rs 255 crore by the end of the year. As there would be no interest on this, the profit will take a hit up to Rs 25 crore. There can be an impact on the bond market as well. All banks have to take a call on various options including a hike in interest rates on advances. A clear picture would emerge after the Credit Policy review. As a listed entity, we also have to protect the interest of the shareholders. The hike in CRR should be seen in the context of the Government’s concern to contain the inflation.

Mr K. Ramakrishnan

Mr S.A. Bhat, Chairman and Managing Director, Indian Overseas Bank, said that his bank’s ALCO (Asset Liability Management Committee) would decide about the hike in interest rates. However, he pointed out that the hike in CRR would increase his cost of funds by only about 10 basis points. He said that this did not necessitate any increase in their prime lending rate which was at 13.25 per cent. Since the PLR was not cut earlier, there was no need to hike it now, he said. He also felt that since inflation was more supply-side driven than due to demand side pressures, he felt the CRR hike may not be fully able to achieve the objective. He said that the RBI may have to consider steps to disincentivise lending to some sectors such as real estate, stock market and traders who were hoarding commodities.

Mr Amitabha Guha, Managing Director, State Bank of Hyderabad, said a 50 basis point hike is not totally unexpected. “What we are thinking is whether this hike is independent of the policy announcement due on April 29. A decision on a rate hike from our side could be taken only after proper examination of all these aspects.”

Mr B. Sambamurthy, Chairman and Managing Director, Corporation Bank, said a CRR hike was expected “probably now or on April 29”. . “This is not a surprise,” he said. Asked if there will be any increase in the lending rates, he said it will definitely impact the cost. “We will discuss it only after the annual monetary policy review on April 29. Then, the future stance will also be cleared. To what extent we will pass on is the question,” he said.

Mr Anantakrishna, Chairman and Chief Executive Officer, Karnataka Bank, said that it was necessary to hike CRR to contain inflation. Asked it would impact lending rates, he said there may not be any immediate impact as the policy review is expected for April 29. Mr M.D. Mallya, Chairman and Managing Director, Bank of Maharashtra, said that the hike was expected because the inflation number was a concern. This is one measure which would suck the liquidity from the system, and help in controlling inflation.

Mr Gautam Vir, Managing Director and Chief Executive Officer, Development Credit Bank, said: “We were expecting a hike due to the inflationary trend. It has happened a little earlier than the expected date of the next policy meet. This measure will see a hardening in interest rates as liquidity will get sucked out of the system. Gradually banks will be able to pass on the increased cost to customers.”

Our Bureaus/Chennai, Hyderabad, Mangalore

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