The Hindu Business Line : Banks press the case for rollback of CRR hike

Anticipating tight liquidity, banks are unwilling to reduce their deposit rates. Instead, some of them have accelerated the deposit mop-up efforts, tweaking rates at the middle and long end.

C. Shivkumar

Bangalore, Aug. 28 Faced with the possibility of tightening liquidity, a clutch of banks has begun pushing for a rollback of the Cash Reserve Ratio (CRR) hike.

The Reserve Bank of India hiked the CRR to 7 per cent from August 6 and mopped up Rs 15,000 crore of liquidity.

The CRR hike had come at a time when credit offtake growth had slowed down to 22 per cent, as against the previous year’s 31 per cent.

Bankers hope for a reversal in the current situation with better farm sector offtake. However, the fear is that the high CRR would impose a pressure on lending rates. This is partly because CRR balances earn no interest.

Already most advances are currently delivered at rates above the current benchmark prime lending rate of 12.75 per cent (BPLR).

Only some direct farm advances like crop credits are extended at 7 per cent, largely on account of the 2 per cent subsidy extended by the Centre. But other advances to the farm sector, including takeover of farmer liabilities to the unorganised moneylenders, are all at rates of 13 per cent. In addition, project loans were also likely to be affected, the bankers said.

This was because, many of the projects that had achieved financial closure more than a year ago, had still not begun drawing down on the project loans. The projects had financed their expenditure out of equity funds in the hope that rates would come back to the 2004 levels.

However, the projects have now begun accessing the loans at rates above BPLR. These include power projects that had initially tied up the funds at 7.5-8 per cent.

Bankers said that the CRR rollback was necessary to prevent interest rate spikes during the peak season, when credit offtake picks up.

The CRR hike was intended to mop up liquidity generated through short-term foreign inflows.

The sub-prime crisis had reversed the situation of accretions to short-term liquidity. This was evident from the liquidity adjustment facility auctions where the bids at the reverse repurchase window had dropped to a tenth of what it was last month.

In fact, most of the bids were at the reverse repo window were currently driven by maturing 91-day Treasury bills and coupon flows from government securities. Coupon flows during the current fortnight ending this month-end is estimated at Rs 11,000 crore.

Anticipating liquidity tightening, many banks are unwilling to reduce their deposit rates.

Instead, some of the banks, anticipating better credit offtake have actually accelerated the deposit mop-up efforts, tweaking rates at the middle and long end. Bank of India, for instance, offers rates of 9.5 per cent at the long-end. Only short end deposit rates remain low. “We are not too keen on short-term deposits,” bankers said.

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