RBI’s new liquidity framework would incentivise credit growth: India Ratings

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Published: March 5, 2020 8:23 AM

Assuming average six-month growth of 7% in retail (home and auto) and MSME segments and the same to be funded by liabilities that in ordinary circumstances would require a CRR of 4% to be kept aside.

RBIThe measure would help banks with lending appetite, but constrained by an unfavourable deposit profile

Rating agency India Ratings and Research on Wednesday said the new liquidity framework announced by the Reserve Bank of India (RBI) would incentivise banks to encourage credit flows to retail and MSME segments. The firm said that the measures are encouraging, especially in the current scenario. “However, the overall success of the measures is hinged on a low-interest elasticity of demand,” the firm said. The interest elasticity of demand is the responsiveness of demand to the change in interest rates. Following the announcement of the LTRO, the central bank has held auctions to infuse `75,000 crore. It has also announced another auction of `25,000 crore.

The rating agency said that the short-term requirement of funds for banks will further reduce amid a low demand for credit, adding that the P&L impact of CRR relaxation is expected to be limited at about `600 crore per annum for the system for the next five years. Depending on the asset class, the firm said that banks would earn between 8-9% on the exempted cash reserve ratio (CRR) amount, against nil, currently.

Assuming average six-month growth of 7% in retail (home and auto) and MSME segments and the same to be funded by liabilities that in ordinary circumstances would require a CRR of 4% to be kept aside, banks would have to keep a low CRR to the extent of `8,000 crore to `9,000 crore over one year, which could consequently have a positive impact on the P&L of about `600 crore annually for the next five years, the agency said. The measure would help banks with lending appetite, but constrained by an unfavourable deposit profile. “The only caveat here is that banks should not use the proceeds of this source towards investments in government securities.”

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