CRR hike to impact profitability of banks

Written by Agencies | Mumbai, Jul 31: | Updated: Jul 31 2007, 19:54pm hrs
Any hopes of interest rates softening in the near-term have dissipated with the 0.5 per cent hike in Cash Reserve Ratio affected by Reserve Bank in its quarterly review of monetary policy on Tuesday, bankers said.

"The CRR hike will definitely impact profitability of banks. We will have to focus on maintaining our net interest margins," Bank of Baroda's Chairman and Managing Director, Anil Khandelwal, said on Tuesday.

CRR is the percentage of depositors' money that commercial banks have to park with the Reserve Bank. The central bank has raised it by 0.5 per cent to seven per cent.

Bankers, however, welcomed the removal of the reverse repo (overnight borrowing) ceiling of Rs 3,000-crore, which they said would provide relief to banks.

Concerns over inflation were clearly visible in the RBI's statement as also its focus on liquidity management, they said.

Simultaneously, they ruled out any decline in lending rates in the medium-term. Decision on deposit rates is a call that individual banks would have to take, they said.

Banks were expecting a status quo and hence the CRR hike was unexpected, IDBI Bank's CFO, L P Aggarwal, said.

"Cost of funds will go up and banks's net interest margins could get adversely impacted," he said.

Interest rates may not go up, but there won't be any slackening either, bankers said.

"No bank will reduce its PLR," private sector lender

Kotak Mahindra Bank's Treasurer Mohan Shenoy said. "In my opinion, rates will remain firm and stable with chances of deposit rates moving up a bit," he said.

Khandelwal of Bank of Baroda said that while his bank feels no need to increase lending rates as of now, it would take a call on its deposit rates soon.

"Deposit rates have peaked and our Asset-Liability

Committee (ALCO) will take a decision on whether to reduce our deposit rates or not," he said.

Deposit rate decisions would not be easy, said IDBI's

Aggarwal. Several factors will have to be taken into account before a decision on this issue could be taken, he said, adding, "we will do a brain-storming before deciding on our deposit rates."

On whether credit growth would slow down because of the CRR hike, bankers said that there was already a decelaration visible.

"Credit growth has decelarated and now with this increase in CRR limits plus the fact that corporates can now access funds from overseas, I feel there might be a slowdown in credit growth," Aggarwal said.

While the GDP growth rate of 8.5 per cent for this fiscal was felt to be achievable, a few bankers opined that inflation control could pose a challenge to the apex bank.

There was a possibility of inflation breaching the five per cent mark, the upper band set by the RBI for this fiscal, towards the end of FY 08, Shenoy said, while IDBI's Aggarwal said that rising oil prices globally could fuel inflation later in the year.