Banks' interest income to dip Rs 2k cr on CRR hike

The banking industry will see its interest income dip by around Rs 2,000 crore on account of the twin measures to hike cash reserve requirements, coupled with reduction in the interest that RBI will pay on cash reserves.

The total reduction in income on existing reserves due to the reduction in rates will be around Rs 412 crore. On the additional Rs 15,500 crore that banks have to park in on account of CRR, banks stand to lose around Rs 1,500 crore.

These factors in the average cost of deposits for the banking industry and the interest income they stand to lose on account of funds being frozen.

The loss suffered by each bank will be in proportion to its share of deposits. State Bank of India, which has a 20% market share, will suffer a hit of around Rs 40 crore on account of these two measures along.

The impact of these measures on profitability will depend upon the extent to which banks pass on the cost. The immediate impact of the measure would be to increase the cost of funds for banks. Cost of funds would move higher as banks would be left with a higher proportion of non-earning assets on which they would have to pay out interest, but earn nothing.

Impact on NIM’s (net interest margins) could be in the region of 2-3 basis points for banks as a result of the increased CRR amounts and cut in the interest rates. Here again, the impact would be dependant upon the respective banks cost of funds.

Most banks have cost of funds in the region of 4-5 %. However, banks could pass on higher funding costs as further PLR increases in lending rates. This could also lead to a spike in the short-term rates.

Most bankers were expecting short-term rates to stabilise as liquidity was expected to ease on higher government spending, but now expect it to stay at similar levels. The hike in reverse repo rates by 25bps could see bond yields move higher leading to higher provisions towards investment depreciation.

This could have a higher impact on banks reliant on the RBI LAF window to fund their assets. However, for FY07 most banks would have closed their books and higher investment losses could impact during Q1FY08 if bond yields continue to move higher. Most banks had indicated that they were comfortable till around 8% on the 10-year yields