RBI policy: CRR cut to improve lenders' margins, may lift credit growth

Deposit rates may start easing

The Reserve Bank of India’s (RBI’s) decision to cut the cash reserve ratio (CRR) by 50 basis points, injecting liquidity of Rs 1.16 trillion into the banking system, is expected to reduce costs for banks and provide a much-needed boost to credit offtake, which has slowed in recent months.

 

Of late banks have been grappling with higher deposit costs.

 

Additionally, the CRR cut is likely to be accretive to banks’ margins and return on assets (RoA), supporting their financial performance, said bankers and industry experts.

 

On Friday, while the RBI’s six-member rate-setting panel decided to keep the policy rate, the repo rate, unchanged for the eleventh consecutive time, it cut the CRR for banks by 50 basis points (bps) to 4 per cent from 4.5 per cent of net demand and time liabilities (NDTL) in two equal tranches of 25 bps each with effect from the fortnight beginning December 14 and December 28. The cut will restore the CRR to 4 per cent of NDTL, which was prevailing before the commencement of the policy tightening cycle in April 2022.

 

“This move directly addresses the twin challenges of tight liquidity and elevated deposit costs, which have constrained credit growth. This CRR cut will not only reduce funding costs but also equip banks to sustain robust credit growth and support the economy’s capital expenditure,” said Harsh Dugar, executive director, Federal Bank.

 

“The benefits will materialise primarily from Q4FY25 and is expected to be accretive to the net interest margin (NIM) and return on assets for banks. It will provide a competitive edge to banks, especially those with a lower proportion of loans linked to the marginal cost of funds-based lending rate,” Dugar added.

 

Although liquidity in banking is surplus at the moment, system liquidity is expected to tighten in the coming months due to tax outflows, increase in currency in circulation, and volatility in capital flows. Liquidity conditions, which had been in surplus over the past two months, tightened recently due to outflows on account of goods and services tax, a likely negative balance of payments (BoP) for the quarter, and increased intervention by the RBI in the foreign-exchange market.

 

Credit growth has come off its highs because there has been competition for deposits to fund demand for loans. According to the latest data from the RBI, credit growth in the fortnight ended November 15 slowed to 11.15 per cent year-on-year (Y-o-Y) while deposit growth slightly outpaced credit growth, reaching 11.21 per cent Y-o-Y.

 

According to SBI Research, the reduction in the CRR may not mathematically translate into any change in deposit and lending rates. However, it may have a positive impact on margins (3-4 bps on the NIM) of the banks.

 

“Banks will have additional resources for lending to productive sectors. This will also result in a lower cost of funds for banks,” said M V Rao, managing director and chief executive officer, Central Bank of India.

 

Subhasri Narayanan, director, CRISIL Ratings, said: “…Additional liquidity would be re-deployed in interest-earning assets, leading to a slight lift in the net interest margins of banks by 3 bps.”