Banks can save up to Rs 7,400 crore in CRR benefits under the new dispensation of targeted lending using their cash reserve ratios, and the incremental credit flow through this can be Rs 1.85 lakh crore, helping them earn Rs 480 crore in additional profits in FY21, SBI Research said.
The RBI, at the previous monetary policy review on February 6, adopted a policy tool that the European Central Bank had deployed during the last sovereign credit crisis, by allowing banks to lend against their CRR to three targeted segments -- retail loans to the auto, housing and MSME sectors.
The monetary authority had also announced long-term repo operations (LTROs) to the tune of Rs 1 lakh crore to ensure long-term durable liquidity, despite the system being awash with Rs 3 lakh crore of surplus liquidity.
Accordingly, the RBI has already carried out three LTROs of Rs 25,000 crore each beginning with the third Monday of February with huge success.
"Using January 2020 sectoral data, we estimate that banks till July 31 can lend up to Rs 1.85 lakh crore to these specified sectors and can save around Rs 7,400 crore if credit grows at 9 percent for housing, and 5 percent for vehicle and MSME loans, as CRR benefits," SBI Research said in a note.
While banks can save this much, the capital charge on Rs 1.85 lakh crore of additional lending will be around Rs 15,000 crore, while the Rs 7,400 crore savings can have positive impact on banks' profitability and cost of deposits.
"We believe that banks' profitability will increase by Rs 480 crore (at 6.5 percent G-sec yield) while the cost of deposits may also be impacted by 2-3 bps. This excellent step if extended to December 31, 2020 (as the second half is more productive in lending due to festive season) can have a larger impact on the banking sector," it added.
The LTROs can bring down the cost of funds for banks who can now borrow up to three year funds at the repo rate.
However, compared to the overall deposits of Rs 132 lakh crore as of February 14, 2020, this amount of Rs 1 lakh crore is not even 1 per cent, so the impact on bank's cost of funds will be miniscule, up to 1-2 bps.
But if the RBI reduced the CRR by 1 per cent, it can release around Rs 140,000 crore lendable funds for banks, which can be used for lending to the desired sector, helping them lower their overall lending rates as the cost of funds will decline and also result in improved profitability for the banking sector, notes the report.
Terming LTROs and lending against CRR as "more a signalling device" than actual measures to lower credit cost to the economy, it said the RBI move to resort to these unconventional methods to provide durable liquidity is a clear example of using "constrained discretion" in monetary policymaking.
The new dispensation goes beyond the textbook prescription of rate cuts to address sectoral imbalances and declining credit growth, the report said.
Empirical evidences suggest that the opportunity to substitute long-term central bank liquidity for short-term liquidity enhances monetary transmission. It also benefits larger borrowers more and does not lead banks to increase their lending to riskier firms.
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