Even after two rounds of surprise repo rate cuts outside the regular cycle on January 15 and March 4 by the Reserve Bank of India (RBI), only a handful of bankers have passed on the benefits to their customers.
In a not-for-attribution quote, an RBI official had even slammed the bank practise of making a “mockery of monetary policy transmission framework” with their tendency to readily borrow from the central bank at the policy rate and then lend that money out at a high rate. But alas, it seemed to have cut no ice with bankers.
Recently, Arundhati Bhattacharya, the Chairman of the State Bank of India (SBI), gave an inkling to the thinking of many bankers when she said a cut in the cash reserve ratio (CRR) would “definitely help” banks to cut lending rates. In an interview to Reuters, she explained the rationale, “We can put money which is today not earning anything, into earning assets. That cushion that we get, enables us to transmit faster,” she said.
CRR or the share of deposits which banks must park with the RBI, has remained constant at 4 per cent during the two recent repo rate cuts.
SBI, which employs 200,000-plus, and has more than 16,000 branches, is the country’s largest bank with a quarter of its banking assets. When the SBI chief speaks, others listen. Is her wish for a CRR rate cut then, an articulation of a genuine grievance? The economic research department of SBI had only a few days ago suggested that the RBI may cut the CRR rate as a prelude to the next bimonthly policy review on April 7. Is the SBI chief then setting up expectations for a CRR cut? Deccan Herald talked to a cross-section of banking sector players, analysts, and policy wonks to get a sense of what’s happening.
Banking sector woes
According to banking expert and RBI chair professor, IIM Bangalore, Charan Singh, “Banks are facing a number of challenges mainly, rise in NPAs (non-performing assets) in the infrastructure sector. There’s low credit offtake, pressure on profitability with the announced hike in salaries, increased number of bank accounts — including under the Prime Minister’s Jan Dhan Yojana (PMJDY) — which need to be serviced, and the absence of provisioning for higher recruitment and technology upgradation.”
Chipped in M Govinda Rao, former member, fourteenth finance commission and emeritus professor, National Institute of Public Finance and Policy: “During good years, the private sector made aggressive investments, particularly PPP (public-private-partnership) projects in highways and power. Later, due to problems of land acquisition, environmental clearance, and inability to source the fuel supply, the projects could not be completed, resulting in huge time and cost overruns. Investments stuck in this manner amount to about 8 per cent of GDP. Banks have lent to them heavily, and as a result, their NPAs have mounted.”
Kishore Sansi, MD and CEO of public sector Vijaya Bank had this to say, “Lot of capex (capital expenditure) has been invested and returns are not coming, which is impacting our balance sheet. Credit offtake is not happening at all. We are mostly dependent on retail and mid-corporate loans. The latter does not give us volume and retail has become very aggressive. For example, we are giving housing loans at the rate of 10.30 per cent as against the rate paid on borrowed funds of 8.75 per cent. So my net interest margin (NIM) gets awfully reduced.”
V K Vijayakumar, investment strategist at Geojit BNP Paribas said, “The ratio of NPAs to total advances, which was around 3.4 per cent a year in March 2013, is now 4.6 per cent. For PSU banks, the ratio is higher at 5.3 per cent. The figure is higher if the restructured loans are also factored in. Also, PSU banks are hugely undercapitalised and, therefore, will not be in a position to expand credit when the economy recovers.”
Where repo, SLR cuts fail
Repo (repurchase) rate is the rate at which the RBI lends short-term money to banks against securities. After two rounds of recent cuts, it is now at 7.5 per cent. Charan Singh thinks there could be a reason behind banker reluctance to cut rates, “Repo rate, which is applicable for borrowings from the RBI, may not be tapped by all commercial banks. Reduction in repo rate is a strong signal, but it takes time to transmit as is the case in many countries.”
At the February 3 review, RBI cut the statutory liquidity ratio (SLR) or the portion of bank deposits which should be parked in government securities from 22 to 21.5 per cent. This was supposed to release about Rs 50,000 crore into the banking system. But the bankers apparently aren’t impressed.
Charan Singh offers a reason, “In India, banks continue to hold many more securities under SLR because of ‘lazy banking’ as well as fears of rising NPAs. Reduction in SLR provides a notional room for surplus liquidity, but need not convert to higher credit offtake.”
Govinda Rao said, “Although SLR reduction allows banks to release funds from government bonds, they have to sell it to other banks. The bond market is thin, besides when every commercial bank tries to sell bonds, their prices fall, which means a rise in interest rate. Also, because of high NPAs, banks are unwilling to lend to the private sector and prefer to hold government bonds even when RBI reduces the SLR to 21.5 per cent.”
Puneet Pal, head (fixed income), BNP Paribas Mutual Fund, has this interesting take: “The current SLR being maintained by banks is close to 30 per cent, almost 8 per cent higher than the mandated requirement. The decision to reduce SLR has not actually led to lower holding of government securities by banks. An SLR cut does not generate more liquidity in the system but is an effort to redirect funding to more productive sectors of the economy rather than the government.”
Vijayakumar says, “SLR provides liquidity but does not lower the cost of funds. Banks would have reduced rates under normal conditions. But these are difficult times when bank profitability is under severe strain.”
CRR cut is popular
Many experts we spoke to are broadly supportive of the SBI chief’s view that a CRR cut would be helpful. Vijaya Bank’s Sansi said, “Suppose CRR is cut down by 50 basis points; an additional surplus cash is available that can be gainfully deployed because in CRR we don’t get any interest. The average ease of advances for Vijaya Bank is 11.32 per cent, and to that extent it can improve the bottomline and some benefit can be passed on to customers.”
Puneet Pal said. “A CRR cut reduces the cost of deposits for banks (for every Rs 100 of incremental deposit, banks have to keep Rs 4 as CRR, which earns no interest); so any reduction in CRR helps banks to reduce their costs. Hence, banks will benefit if the CRR is cut.”
Vijayakumar is also supportive, “Cut in policy rates do not reduce the cost of funds of banks. On the other hand, a cut in CRR will reduce the cost of funds.”Not everybody, however, is on board. In Charan Singh’s view, “Increased liquidity because of lower CRR could also be used to invest in SLR bonds. So credit offtake to the private sector would continue to be low.”
Govinda Rao adds a note of caution, “Monetary policy calibration is most effectively done by altering the policy rates. CRR and SLR are indirect measures. Besides, in the prevailing environment, where NPAs are high, cutting CRR would be risky as people’s confidence depend on the ability of banks to ensure their deposits are safe. It would be more prudent to manage their repo rate rather than either the CRR or SLR.”
Puneet Pal thinks that the SBI chief may be trying to set up expectations ahead of April 7. But there’s also a sense that the RBI will make its own call. As Vijayakumar puts it, “Banks cannot influence RBI decisions through statements. RBI decisions will be data dependent.”
WILL CRR CUT WORK?
Pros
Additional surplus cash is available that can be gainfully deployed because no interest is paid in CRR
A CRR cut trims the cost of deposits since for every Rs 100 in additional deposit, banks have to keep Rs 4 as CRR
Reduction in CRR rate allows banks to release funds for lending immediately
CONS
Increased liquidity because of lower CRR could still be used to invest in SLR bonds
Monetary policy calibration is most effectively done by altering the policy rates
Where NPAs are high, cutting CRR would be risky as people’s confidence depend on perceptiond about bank safety