The central bank Thursday sought to ease access to loan funds for new retail buyers of homes and cars and for small-business owners, freeing up high-street lenders from the need to maintain mandatory cash pools against incremental advances to these categories of borrowers.
The move by the Reserve Bank of India (RBI) to ease the cash reserve ratio, or CRR-equivalent, on these borrowing segments will help free up more resources for lending — even in the absence of another round of reduction in policy rates by the central bank. The cost of funds is likely to ease as well.
“The exemption of CRR maintenance for all additional loans given to certain segments of retail will help lower the cost of funds,” said State Bank of IndiaNSE -0.43 % chairman Rajnish Kumar.
At present, banks need to keep aside 4% of their net demand and time liabilities (NDTL) as CRR with the central bank. As a result, banks have less funds to lend.
So, Thursday’s move could give a much needed push to bank lending, according to AK Das, CEO at Bank of India.
Bank loan growth is expected to touch a 58-year low of around 7% in FY20.
Commercial banks will be allowed to deduct the equivalent of incremental credit disbursed as retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs), effective the fortnight ended January 31, 2020, from their NDTL for CRR maintenance, the central bank said Thursday. This benefit will last until July 31.
Home loans, vehicle loans and loans to MSMEs accounted for 22.4% of gross bank credit as of end December, showed the latest RBI data on sectoral deployment of bank credit. “The removal of CRR on select loans (about 15% of banks’ outstanding loans) may marginally lower the interest on such loans and temporarily boost the net interest income at banks,” said Sujan Hajra, chief economist, Anand Rathi Group.
The cost savings could be passed on to the borrowers as well. “Assuming that loans to these sectors grow around 15-16% and considering that the sectors combined account for 22-24% of the gross bank credit, sector level savings could be around ₹8,000 crore over the next six months,” said Karthik Srinivasan, vicepresident at ratings firm Icra. “Instead of not earning anything by locking the funds under CRR, these could earn over 8% for the banks, a part of which could be passed on to the borrower.”