CRR hike to hit ICICI Bank, SBI most, says Goldman

State Bank of India (SBI) and ICICI Bank, the nation's two biggest banks, will be worst hit by the central bank's decision to increase the amount of cash they must hold with it, according to a Goldman Sachs Group report.

The Reserve Bank of India (RBI) said on April 17 it would raise the cash reserve ratio (CRR) to tackle inflation, which is running at a three-year high. Banks, already facing slower loan growth with interest rates at the highest in six years, would see earnings and returns fall by 1 per cent to 2.7 per cent, the Goldman analyst said.

"ICICI Bank is likely to be the most impacted by this change followed by State Bank of India and other state-owned banks,'' Goldman analyst Sampath S K Kumar wrote in a note to clients on April 18.

RBI will raise CRR to 8 per cent from 7.5 per cent in two phases by May 10, according to a statement in Mumbai on April 17. The increase, the first in 2008, would drain as much as Rs 18,500 crore from the financial system, the central bank said.

ICICI Bank's average cost of funds is higher than most state-run banks as it depends more on large deposits that come with higher interest rates. State-run banks have lower cost deposits from retail savers.

Low-cost deposits, which consist of current and savings accounts, comprise 27 per cent of ICICI Bank's deposits and 39.45 per cent of State Bank's, according to information on the websites of the banks.

The central bank meets on April 29 to review the monetary policy. Loan growth slowed to 21.6 per cent in the year through March 2008, from 28.1 per cent a year earlier as consumers deferred purchases of automobiles and homes because of higher interest rates.