'Inflation steps not to hit banks'

MONEY MARKET ROUND-UP

A day after the Reserve Bank of India (RBI) raised the cash reserve ratio (CRR) to suck out excess liquidity, Finance Minister P Chidambaram today said the country's healthy banking sector would be able to absorb the marginal impact on profitability, owing to the measure to fight inflation.

"Net impact will be felt on the net interest margin of banks. If Rs 15,000 crore is absorbed through CRR and another Rs 15,000 crore through reverse repo, the net impact will be 0.03 per cent on net interest margin," Finance Minister P Chidambaram told reporters after meeting the public sector bank chiefs here.

In the quarterly monetary policy review yesterday, the RBI used two instruments "" it raised banks' reserve requirements by 50 basis points and removed the cap on its daily absorption of funds through reverse repo "" to fight excess liquidity due to heavy capital inflows.

"That (measures) is something the banking sector has to bear to fight inflation," Chidambaram said, adding that the RBI's concern on excess liquidity was very legitimate.

Following the monetary policy stance, the minister said banks were inclined to lower deposit rates of one-year term by about 50 basis points.

Banks were aggressively mobilising deposits by giving 9.5-10 per cent interest for one-year deposits due to the hardening of interest rates. Banks have mobilised a record Rs 1,02,866 crore during April-June this financial year compared with Rs 75,626 crore in the same period last year.

"By and large, there is no serious impact of the monetary policy on banks. Credit growth is projected 24 per cent for this financial year, which will take care of the needs of productive sectors," he said.

Chidambaram said he expected the net non-performing assets (NPAs) of the state-owned banks to come down further in due course of time to 1.05 per cent as of March 2007 from 3 per cent in March 2004.

He said public sector banks' exposure to the real estate sector had come down and, if necessary, there would be a further re-balancing of their portfolios.

During the meeting with bank chairmen and managing directors, Chidambaram also discussed enhanced lending to minorities and opening of branches in minority-dominated districts. Other issues taken up included performance of the banks in 2006-07.