Much of the period over which the benefit has been offered overlaps with the lean season for the banking sector.
The Reserve Bank of India’s (RBI) decision to free up a share of banks’ cash reserve ratio (CRR) equivalent to new housing, auto and small-enterprise loans disbursed over the six months ending July may have only a limited impact on credit growth, industry experts said.
Much of the period over which the benefit has been offered overlaps with the lean season for the banking sector. “We will have to wait for the fine print. Unless the benefit takes into account asset pools bought by banks from non-banks, it is unlikely to yield much of a benefit to banks. Six months is too brief a period for banks to market a cheaper loan and then grow their books substantially,” an industry expert said.
Since the measure effectively opens up deposits that would have otherwise been unavailable for lending, banks would see an at least 350-basis point (bps) fall in their cost of funds. State Bank of India chairman Rajnish Kumar said, “Exemption of CRR maintenance for all additional loans given for retail loans for automobiles, residential housing, and loans to MSMEs is positive for banks, auto sector, residential housing and MSMEs will also help to lower cost of funds.” Consequently, the move has led some to expect lower interest rates for borrowers.
However, bankers say lending rates may not immediately go down as a result of the regulatory breather. Federal Bank executive director and CFO Ashutosh Khajuria lauded the CRR benefit while stating that CRR is only one of the factors which determines loan pricing. “This move has made some room available to banks to reduce their lending rates for the segments eligible for CRR benefit, but linking it (the CRR benefit) straightaway to borrowing rates and expecting a proportional cut would not be correct,” Khajuria said, adding that transmission through external benchmark-linked loans has been much greater than that through the repo rate.
The central bank on Thursday said the CRR exemption was aimed at revitalising the flow of bank credit to productive sectors having multiplier effects to support impulses of growth. “As a part of this, it has now been decided that scheduled commercial banks will be allowed to deduct the equivalent of incremental credit disbursed by them as retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs), over and above the outstanding level of credit to these segments as at the end of the fortnight ended January 31, 2020, from their net demand and time liabilities (NDTL) for maintenance of cash reserve ratio (CRR),” the RBI said in its statement on developmental and regulatory policies. The exemption will be available for incremental credit extended up to the fortnight ending July 31, 2020.