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BL Research Bureau

In a move that may push banks to loosen their purse strings and invest less in safer options, RBI has cut the cash reserve ratio by 50 basis points and policy rates (repo and reverse repo) by 100 basis points.

Though the repo and reverse repo cuts were expected, the CRR cut was unexpected and the repo rate cut of a higher degree than factored into bond prices.

Banks appear to have enough liquidity now, having parked more than Rs 40,000 crore, on an average, for last week in the reverse repo window.

The reverse repo cut will deter such parking of excess funds with RBI.

The deep repo rate cut signals further reductions in lending rates. The CRR cut will release an additional Rs 20,000 crore into the banking system.

Banks will benefit from this move, as the zero-yielding CRR funds can be deployed at higher rates to earn a spread. There is, however, no guarantee that banks will route all these funds to credit-starved sectors such as realty and infrastructure.

Though there is scope for further lending rate cuts, banks may adopt a wait and watch attitude as their earlier rate cuts came into effect only recently.

Deposit rates, however, are sure to fall sharply. The investment books of banks will reap further gains from the falling yields as a result of the rate cut.

As the credit off-take targets have been revised higher, capital adequacy issues may arise for banks. This problem is sought to be solved by the Rs 20,000-crore re-capitalisation scheme for banks.

Public sector banks, which have run out of capital raising avenues and are in no position to raise equity due to the 51 per cent cap, will be supported by this scheme.

Public sector banks such as Andhra Bank, Bank of Baroda, and Oriental Bank of Commerce, where Government stake is close to 51 per cent, may benefit from this move.

Though the details of the scheme are not known, public sector banks may be allowed to come up with rights offers and the Government will subscribe to the extent of maintaining its stake.

However, there exist other options such as Tier-1 debt and Tier-2 subordinate bonds which can be raised to maintain capital adequacy.

The Rs 25,000-crore special purpose vehicle for NBFCs may allow them to pledge investment-grade securities and raise cash temporarily.

As several NBFCs are suffering from asset-liability mismatches and are finding it hard to raise funds to lend, this window will help them raise more money and stabilise their business.

This window is above the Rs 20,000-crore repo window, which has been relatively unused by NBFCs.

This SPV will have an advantage over the special repo window as banks will be dis-intermediated, paving the way for NBFCs to directly borrow from the SPV.

More Stories on : Financial Policy | CRR & Bank Rates | Insight

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