State Bank of India Chairman Pratip Chaudhuri again made a strong pitch for a reduction in banks' Cash Reserve Ratio (CRR) at the Reserve Bank's mid-quarter review of monetary policy scheduled September 7.
CRR is the proportion of deposits that banks need to keep with RBI as cash. Banks do not earn any interest on it. At present, the CRR is 4.75 per cent.
"I would like to be optimistic. I expect a one per cent cut in CRR," he said, when asked about his expectation, at the sidelines of the Ficci-IBA banking seminar. "It is likely that a cut in CRR will bring changes in the base rate (BR)." The BR is the benchmark lending rate to which all loan rates are linked.
Chaudhuri said a one per cent cut in CRR would release Rs 10,000 crore for SBI. This could be deployed and earn the bank at least Rs 800 crore. The benefit could be passed on to borrowers by lowering the BR.
The SBI chief said the effect of a cut in the policy rate or the repo rate would be minimal for banks. Such a move would not help banks to reduce lending rates. RBI reduced the CRR twice at the beginning of the year, by a total of 125 basis points (bps).
It had also reduced the Statutory Liquidity Ratio by 100 bps, to 23 per cent of banks' net demand and time liabilities. SLR is the proportion of total deposits that a bank must maintain in the form of cash and other specified deposits.
Following the cut in SLR, several banks (including SBI)
According to Chaudhuri, the correlation between the repo rate and the BR was weak. "If you look at SBI, a one per cent CRR cut releases Rs 10,000 crore (Rs 100 billion), on which if you put a value of eight per cent is Rs 800 crore (Rs 8 billion).
So, that is the amount that can be passed on to borrowers. If you have a repo rate cut, the total increment benefit is not even Rs 100 crore (Rs 1 billion). That is why when RBI increased the interest rate three times (in the second half of 2011), none of the banks increased the BR. So, my point is that the correlation between the repo rate and the base rate is direct -- they move in the same direction -- but the correlation is weak," he said.
SBI reduced deposit rates on Wednesday on account of robust resource mobilisation and slack credit demand. It is hopeful that loan demand will pick up during the remaining part of the financial year.
"We have not yet revised (lowered) the credit growth target for the current financial year; we are still looking at 18-20 per cent growth. The first quarter is generally slow," said Chaudhuri. He said the demand for loans was coming from consumer segments, while industry demand was still low.