Shares of Indusind Bank, SBI, Axis Bank, ICICI Bank, and Yes Bank all gained on Thursday after Reserve Bank of India announced measures to revitalise the flow of bank credits to sectors such as automobiles, residential housing, and MSMEs.
Shares of Indusind Bank, SBI, Axis Bank, ICICI Bank, and Yes Bank all gained on Thursday after Reserve Bank of India announced measures to revitalise the flow of bank credits to sectors such as automobiles, residential housing, and Micro, Small and Medium Enterprises (MSMEs). In a press release, the central bank said that loans lent by commercial banks to these sectors will be exempted from cash reserve ratio (CRR) guidelines. Helping banks lend more and earn more interest income.
Indusind Bank gained 4.85 per cent; State Bank of India jumped 3.55 per cent; Axis Bank was up by 1.77 per cent and ICICI Bank moved up 0.51 per cent during the day’s trade. The Nifty PSU Bank index ended the day 2.63 per cent up while Nifty Private Bank gained 0.92 per cent.
In a statement, the central bank said, “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 for maintenance of cash reserve ratio.”
Although the move is a temporary one, ending in July, the move will help banks free up some capital that would have been otherwise kept aside as CRR. Banks will be attracted to lend to the sector mentioned by the RBI to generate additional interest income.
“Sentiment further boosted as the RBI tweaked maintenance of CRR norms to aid funding to MSMEs, housing and auto sectors while the key rates remained unchanged. In line with the benchmark index, mostly sectoral indices ended higher and the broader market settled slightly on the advancing side,” said Ajit Mishra, VP Research, Religare Broking Limited.
Auto and real estate sectors have been at the receiving end of bad consumer sentiment that saw auto sales plummet while NPA is real estate have resulted in stalled real estate projects. MSMEs have been highlighted by the RBI as “sector (that) plays an important role in the growth of the Indian economy, contributing over 28 per cent of the GDP, more than 40 per cent of exports while creating employment for about 11 crore people.”
“The steps, like the removal of CRR, the introduction of LTRO and the extensions of DCCO, taken by RBI is welcome by NBFC, Reality, Auto, real estate and markets as a whole,” said Vishal Wagh, Research Head, Bonanza Portfolio Limited.
The Reserve Bank of India takes stock of the CRR, it mandates that banks store a proportion of their deposits in the form of cash so that the same can be given to the bank’s customers if the need arises. The percentage of cash required to be kept in reserves, vis-a-vis a bank’s total deposits, is called the Cash Reserve Ratio.