Banks expect a cut in CRR

Banks are expecting a cut in Cash Reserve Ratio (CRR) in the forthcoming bi-monthly monetary policy review, which is scheduled for next week.

“We expect and will request about 50 basis points (bps) cut in CRR which would release about Rs 40,000 crore to the banking system,” said T.M. Bhasin, Chairman, IBA and MD & CEO of Indian Bank, here.

With the inflation easing, there is a possibility of recalibration of rate. As far as bankers are concerned, the preferable mode is passing on the reduction of CRR cut, “which gives us leeway in reducing rate of interest on advances,” Mr. Bhasin added.

“We have surplus liquidity in the system as there has not been much credit off-take so repo window doesn’t give banks any advantage as we don’t borrow at this point. So the CRR window helps us bring down cost of funds,” said Mr. Bhasin.

Repo rate is the rate at which banks borrow funds from the central bank.

While announcing first bi-monthly monetary policy for 2015-16, the RBI Governor, Raghuram Rajan said that “transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts.”

Repo window The repo window is not used by banks and hence there is no monetary advantage and Rs.40,000 crore could be straightaway interest bearing, according to Mr. Bhasin.

The IBA also represented to the Government recently that the rate of interest on Government’s small saving schemes should be brought down.

“Since, we have to compete with such schemes in smaller areas, we cannot be suffering from diversion of funds from the banking system to other avenues. So, we requested for a recalibration of those rates as cost of funds can be helped and it can be an indicator of the parameter where we can reduce base rate at a faster pace.”

He also said that deposit rates have reached the point of inflection and further rate reduction will depend on recalibration of small savings schemes.

“We cannot change deposit rates as funds then get diverted to small saving schemes.”

“If we keep on reducing rate of interest on advances and our cost of funds don’t come down then our Net Interest margin (NIMs) get affected.”