With the Reserve Bank of India (RBI) having trimmed the Cash Reserve Ratio (CRR) by 25 basis points to 4.25%, banks now have an additional R17,500 crore to lend. Should the RBI pay heed to the government? s suggestion that it pay interest on banks? CRR balances with it, they may get luckier; at an interest rate of 8% they could well have access to another R20,000 crore or so, theoretically allowing a 25-30 bps rate cut. Even without the interest earnings on the CRR though, the extra R17,500 crore should help banks offer cheaper loans, especially those that are not going to be hit by the higher provisioning requirments for standard restructured assets; some, like the State Bank of India (SBI), have already said their ALCOs will meet soon to consider a cut in the base rate.
Of course, lower interest rates alone cannot spur demand for credit?it?s well documented by now that the reason why corporates aren?t investing in new projects relates to unclear regulation, delayed clearances and insufficient supplies of raw materials and not just the cost of money alone. However, retail loans appear to have picked up in recent months after banks started offering customers cheaper products. The problem, after a point when the economy gets back on track, though may not be the demand for credit but how banks are going to mobilise enough deposits to be able to lend at affordable rates. In the fortnight to October 19, deposits with banks grew at just 13.61% year-on-year, de-growing by R22,427 crore over the previous fortnight. While one could argue that we?re in the midst of the festive season just now and so there?s bound to be more cash with households, there?s no getting away from the fact that the pace of deposit growth has been alarmingly sluggish this year?just 4.5% between April and now?compelling RBI to lower its deposit growth forecast to 15% for the current year. The main reason for this has been the runaway inflation forcing households to leave less in the bank. Equally important, the returns from financial savings, especially fixed deposits, have been lower than those from physical assets such as gold. It?s possible that consumers will start saving again once their disposable incomes go up. In the meantime, though, banks are having a tough time attracting deposits and are understandably reluctant to cut rates beyond a point even though there may not be too much evidence of a strict correlation between bank rates and bank deposits.?That means banks may need to take a small hit on their net interest margins (nims) for some period of time?it remains true Indian banks enjoy fatter margins than their counterparts in other countries and some compression wouldn?t hurt.
