Banks can save up to Rs 7,400 cr from lending against CRR, earn Rs 480 cr in additional profits: Report

The RBI, at the previous monetary policy review on 6 February, adopted a policy tool by allowing banks to lend against their CRR to three targeted segments -- retail loans to the auto, housing and MSME sectors.

Press Trust of India March 05, 2020 12:18:02 IST
Banks can save up to Rs 7,400 cr from lending against CRR, earn Rs 480 cr in additional profits: Report
  • The monetary authority had also announced long-term repo operations to the tune of Rs 1 lakh crore to ensure long-term durable liquidity

  • The LTROs can bring down the cost of funds for banks who can now borrow up to three year funds at the repo rate

  • Empirical evidences suggest that the opportunity to substitute long-term central bank liquidity for short-term liquidity enhances monetary transmission

Mumbai: Banks can save up to Rs 7,400 crore in CRR benefits under the new dispensation of targeted lending using their cash reserve ratios, and the incremental credit flow through this can be Rs 1.85 lakh crore, helping them earn Rs 480 crore in additional profits in FY21, SBI Research said.

The RBI, at the previous monetary policy review on 6 February, adopted a policy tool that the European Central Bank had deployed during the last sovereign credit crisis, by allowing banks to lend against their CRR to three targeted segments -- retail loans to the auto, housing and MSME sectors.

The monetary authority had also announced long-term repo operations (LTROs) to the tune of Rs 1 lakh crore to ensure long-term durable liquidity, despite the system being awash with Rs 3 lakh crore of surplus liquidity.

Banks can save up to Rs 7400 cr from lending against CRR earn Rs 480 cr in additional profits Report

Representational image. News18

Accordingly, the RBI has already carried out three LTROs of Rs 25,000 crore each beginning with the third Monday of February with huge success.

"Using January 2020 sectoral data, we estimate that banks till 31 July can lend up to Rs 1.85 lakh crore to these specified sectors and can save around Rs 7,400 crore if credit grows at 9 percent for housing, and 5 percent for vehicle and MSME loans, as CRR benefits," SBI Research said in a note.

While banks can save this much, the capital charge on Rs 1.85 lakh crore of additional lending will be around Rs 15,000 crore, while the Rs 7,400 crore savings can have positive impact on banks' profitability and cost of deposits.

"We believe that banks' profitability will increase by Rs 480 crore (at 6.5 percent G-sec yield) while the cost of deposits may also be impacted by 2-3 bps. This excellent step if extended to December 31, 2020 (as the second half is more productive in lending due to festive season) can have a larger impact on the banking sector," it added.

The LTROs can bring down the cost of funds for banks who can now borrow up to three year funds at the repo rate.

However, compared to the overall deposits of Rs 132 lakh crore as of 14 February 2020, this amount of Rs 1 lakh crore is not even 1 percent, so the impact on bank's cost of funds will be miniscule, up to 1-2 bps.

But if the RBI reduced the CRR by 1 percent, it can release around Rs 140,000 crore lendable funds for banks, which can be used for lending to the desired sector, helping them lower their overall lending rates as the cost of funds will decline and also result in improved profitability for the banking sector, notes the report.

Terming LTROs and lending against CRR as "more a signalling device" than actual measures to lower credit cost to the economy, it said the RBI move to resort to these unconventional methods to provide durable liquidity is a clear example of using "constrained discretion" in monetary policymaking.

The new dispensation goes beyond the textbook prescription of rate cuts to address sectoral imbalances and declining credit growth, the report said.

Empirical evidences suggest that the opportunity to substitute long-term central bank liquidity for short-term liquidity enhances monetary transmission. It also benefits larger borrowers more and does not lead banks to increase their lending to riskier firms.

Updated Date:

Find latest and upcoming tech gadgets online on Tech2 Gadgets. Get technology news, gadgets reviews & ratings. Popular gadgets including laptop, tablet and mobile specifications, features, prices, comparison.

also read

CBI books four of its personnel for taking bribe from bank fraud accused, conducts searches at 14 locations
India

CBI books four of its personnel for taking bribe from bank fraud accused, conducts searches at 14 locations

The CBI booked deputy superintendents of police RK Rishi and RK Sangwan, Inspector Kapil Dhankad, and Steno Samir Kumar Singh. It also searched the premises of Rishi, who is posted at the CBI Academy, Ghaziabad

Union Budget 2021: Govt must redirect focus on resolving demand-side issue for economic recovery
India

Union Budget 2021: Govt must redirect focus on resolving demand-side issue for economic recovery

Sunil Kumar Sinha of India Ratings warned that even if the supply-side bottlenecks get restored on account of various RBI measures it may soon run into difficulties due to the lack of adequate demand

2020 in review: Digital payments policy initiatives in 2020 that could have a lasting impact
India

2020 in review: Digital payments policy initiatives in 2020 that could have a lasting impact

Overall, the RBI has shown a welcome range in its focus last year, from financial inclusion, promoting innovation to easing payments in the pandemic.