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C. Shivkumar

Bangalore, Oct. 16 The net interest margins (NIM) of banks are likely to jump sharply during the third quarter of this financial year after the 250 basis points reduction in the Cash Reserve Ratio (CRR).

CRR is the zero interest cash balance that banks maintain with the Reserve Bank of India (RBI) against their net demand and time liabilities. The cuts brought down the CRR to 6.5 per cent from 9 per cent from the beginning of this month.

Top bankers said the liquidity infusion of Rs 1.25 lakh crore through CRR reduction and compensation of the farm loan waiver would have an impact of at least 25 basis points on the NIM of banks.

NIMs reflect the difference between the interest income and interest expenditure and is a key indicator of bank profitability. For the second quarter, the NIMs for the banking sector were estimated at around 2.2 per cent.

Bankers said the release of the funds would now enable the banks to profitably deploy the resources. So far, bankers said the impact of the hike in the CRR was mostly absorbed by the banks. Only some private sector banks had passed on the cost of interest loss on CRR balances to borrowers.They said that in the initial stages the released CRR balances were likely to be mostly parked in Government securities. This would earn the banks a current yield of at least 8.5 per cent.

Current yield is the coupon flows at the present market price. Accordingly, incremental income flows would increase, they said. The release of the CRR funds has already resulted in the ten-year yield to maturity (YTM) dropping sharply to 7.71 per cent from last weekend’s 7.95 per cent.

But bankers said that the released funds would also find their way into credit during the course of Q3, especially for infrastructure projects that have been prioritised for resource allocation. Infrastructure projects, especially power projects, have been unable to access cross-border funds through the external commercial borrowing route.

This was in view of the steep increase in the London Inter Bank Offered Rate. Six-month LIBOR is currently about 4.16 per cent or about 75 basis points more than the September average.

The spreads over LIBOR for Indian borrowers are currently upwards of 500 basis points depending on the tenure, well above the RBI prescribed ceiling of 450 basis points. Longer dated borrowings have higher spreads. As a result, long-term funds, inclusive of hedging costs are far too expensive, bankers said. Consequently, infrastructure borrowers have shifted to the domestic banking system for funds. Bankers said that some of the borrowings were likely to be refinanced when global financial markets stabilised.

More Stories on : Banking | CRR & Bank Rates | Farm credit

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