The reduction in the Cash Reserve Ratio (CRR) by 50 basis points may not impact rates but provide relief on banks on squeezed margins.
The Reserve Bank of India (RBI) announced a reduction in the Cash Reserve Ratio (CRR) by 50 basis points in two tranches of 25 bps each, lowering it to 4.0% of net demand and time liabilities (NDTL). The cuts will take effect on December 14 and December 28, 2024, releasing Rs 1.16 lakh crore into the banking system.
“The reduction in CRR may not mathematically translate to any change in deposits and lending rate, however, it may have positive impact on margins (3-4 bps on NIM) of the banks,” SBI Research said in a report.
The liquidity challenge
It said liquidity in the system has been significantly impacted by the wide volatility in Government cash balances a counter cyclical measure to address systemic liquidity.
This has entered a new phase with the launch of SNA Sparsh, replacing the earlier CSS-SNA and absorbing huge float funds from the banking system. 27 Major CSS schemes having a Budget outlay of Rs 3.70 lakh crore have migrated to SNA SPARSH in FY 2024-25.
SNA SPARSH eliminates the role of commercial banks, as central ministries and state treasuries are integrated on RBI’s eKuber platform using IFMIS (Integrated Financial Management and Information System). The next couple of years will thus be the biggest challenge for the RBI liquidity management to take care of an estimated Rs 7.5 trillion fund flow through IFMIS.
“Thus we strongly recommend that CRR may be brought down to 3%, that was prevailing in March 2020. This could release an additional Rs 2.32 trillion in the banking system,” it said.
The rate tango
As of November 15, 2024, deposit growth outpaced credit growth on a year-on-year basis, with deposits increasing by 11.2% to Rs 218.5 lakh crore and credit offtake growing by 11.1% to Rs 173.6 lakh crore.
The deceleration in credit growth compared to 20.6% in the previous year is attributed to a high base effect, a slowdown in credit to non-banking financial companies (NBFCs), and tighter regulatory norms such as higher risk weights and proposed liquidity coverage ratio (LCR) requirements.
Meanwhile, lending rates have remained relatively stable, with the weighted average lending rate (WALR) on rupee loans unchanged at 9.88% in October 2024. Deposit rates on outstanding rupee term deposits edged up slightly by 1 basis point to 6.96%, while the spread between lending and deposit rates narrowed to 2.92% for scheduled commercial banks (SCBs).
Private sector banks (PVBs) and public sector banks (PSBs) have experienced margin pressures over the past year. The spread for PSBs declined to 2.11% in October 2024, while PVBs saw a slight contraction to 3.94%. However, fresh lending margins have increased, indicating banks’ resilience in maintaining profitability despite rising funding costs.
