Banks to do business with Rs 9,500 cr less | india | Hindustan Times
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Banks to do business with Rs 9,500 cr less

india Updated: Jul 29, 2008 21:09 IST
BS Srinivasalu Reddy

It’s been a double whammy for the banks from the RBI. The cash reserve ratio (CRR or a slice of deposits banks have to keep with the RBI)) hike is set to suck out Rs 9,500 crore of their lendable resources. On the other hand, the repo rate hike, and consequent rise in yields of government securities, is set to heap heavy burden of higher provisioning requirements.

The central bank hiked the repo rate by 50 basis points to 9 per cent and the repo rate by 25 basis points to 9 per cent announcing an all out fight against inflation. The Rs 9,500 crore, which would have otherwise earned huge revenue through lending operations, will not fetch any revenue for the banks. It is just like an asset impounded.

“There is every possibility of banks raising lending rates,” said MD Mallya, CMD, Bank of Baroda. “Market borrowing will become costly for banks and credit growth to slowdown. All these developments will put pressure on spreads (profit margins) of banks.”

Taking cue from the RBI moves, banks are likely to hike deposit and lending rates shortly. As the credit growth is expected to slowdown, the banks may not be in a position to shift the burden of hike in rates fully on to customers.

Besides, the rising rate scenario will lead to fall in valuation of market investments made by banks. They have to make a provision against such slide in market valuations as a prudential measure.

Lending rate hikes are expected to push the non-performaing assets (NPAs) northwards. “As the rates go up, those who were on the edge of defaulting will turn defaulters,” said chief financial officer of a top bank, who wished not to be quoted.

Citing more reasons for hiking rates, another senior banker said, there are several sectors to which we have to lend at fixed rates, like at 7 per cent to farmers, at concessional rates to exporters, etc. “We have to make it up somewhere. So rate hikes are imminent when cost of funds look up.”

Meanwhile, the RBI expressed concern over worsening credit-deposit ratio of banks following unbridled credit expansion by banks in 2008-09. RBI governor YV Reddy asked banks to review their business strategies so that they are in a position to combine longer term viable financing with profitability in operations, recognising the reality of business cycles and counter-cyclical monetary policy responses. The RBI governor also said that there would a supervisory review of bank's books to identify those banks having high credit-deposit ratio.

On CRR and repo rate hikes impacting bank profitability, Reddy said, “So far we have not seen any fall in bank profitability.” “It has only been going up. We have to look at not just bank balance sheets, but also how inflation affects people's balance sheets.”