Banks' interest income to decline by Rs 500 crore

Impact of increase in banks' cash reserve ratio by 50 basis points

The banking industry's interest income from the cash reserve ratio (CRR) money kept with the Reserve Bank of India (RBI) will come down by around Rs 500 crore in the remaining part of fiscal 2004-05.

The RBI on Saturday lowered interest rate on CRR from the current 6 per cent to Rs 3.50 per cent.

Interest income of the State Bank of India (SBI) will be lower by Rs 100 crore, while that of Canara Bank will be lower by Rs 35 crore.

The other major loser are Punjab National Bank (Rs 34 crore), ICICI Bank (Rs 28 crore), Bank of Maharashtra and Syndicate Bank (Rs 24 crore each).

State Bank of India will have put an additional Rs 2,000 crore with the RBI on account of the increase in CRR by 50 basis point to five per cent. With this SBI's cash with the RBI will increase to Rs 19,727 crore from Rs 17,756 crore as on March 31, 2004.

The other top banks which will have to keep additional money with the RBI are Canara Bank (Rs 698 crore), Punjab National Bank (Rs 671 crore), ICICI Bank (Rs 551 crore), Bank of Maharashtra (Rs 481 crore), Syndicate Bank (Rs 484 crore) and Bank of India (Rs 441 crore).

An RBI release said with effect from the fortnight beginning September 18 banks will be paid interest at the rate of 3.5 per cent per annum on their eligible cash balances maintained with the RBI under the CRR head, as against the current practice of payment of interest at the bank rate (6 per cent per annum). The payment of interest on monthly basis will continue as at present.

The internal group on liquidity adjustment facility (December 2003) had recommended that with substantial scaling down of CRR coupled with marked decline in overall interest rate structure in the economy and increasing liquidity needs of participants...., the degree to which CRR had been impacting banks as an implicit taxation earlier is considerably less in recent period.

"Accordingly, the remuneration of eligible cash balances at the bank rate is no longer justifiable and the remuneration of CRR, if any, be delinked from the bank rate and placed at a rate lower than the repo rate," the group had said.