Bankers' take on why RBI won't cut CRR

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Bankers' take on why RBI won't cut CRR

A sluggish credit growth signifies low demand for bank loans. If the Reserve of Bank India cuts the cash reserve ratio (CRR), it will only add to more supply of money into the system. Given the lacklustre loan market, RBI may revise its credit growth projection for FY12, said bankers.

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Saikat Das
Moneycontrol.com

A sluggish credit growth signifies low demand for bank loans. If the Reserve of Bank India cuts the cash reserve ratio (CRR), it will only add to more supply of money into the system. Given the lacklustre loan market, RBI may revise its credit growth projection for FY12, said bankers, who are mulling further revision of their respective credit expansion target.

RBI will announce its mid-quarter monetary policy review on December 16. CRR is the fixed portion of total deposits that banks mandatorily have to keep with the Reserve Bank of India. Currently, it is at 6%. This means, for every Rs 100 deposit, lenders are to set aside Rs 6 as CRR.

 "RBI always keeps the market a little short of liquidity," said R K Bakshi, executive director, Bank of Baroda told Moneycontrol.com.

"Credit off-take is very slow. We are aiming 19% y-o-y credit growth in FY12. However, the incremental growth so far is dismal at around 2-3%. The government needs to do something to ramp up the credit demand. In this situation, RBI is unlikely to reduce CRR. The regulator can only do it if it wants to send dovish signal to the market."

The reverse repo rate or the rate at which RBI borrows money from banks, according to some bankers, has essentially become more effective tool for the regulator to tweak liquidity situation.

RBI data shows, the non-food credit that banks lend to companies and individuals has slipped below the RBI's projected 18% mark to 17.4% as on 18 November, 2011-12. This was indicative of the slowdown in the economy.

"Given the economic condition, opportunities for credit growth are limited," said B Prabhakar, executive director, Bank of India (BoI).

"There is no a major chance for CRR cut. If RBI does it, it will defeat their policy stance of tight liquidity to control inflation. However, it may reduce CRR, be it now or later, to support the government's borrowing programmes. The regulator could also review the target for credit projection from 18 to 17%." 

So, how do bankers plan to ease the credit freeze?

In the wake of rising non-performing assets, banks are treading cautious while extending credit. They plan to expand their books by extending loans to sectors like agriculture as well as small and medium enterprise (SME). Road projects, of late, has again drawn bankers' attention toward infrastructure sector.

"We have seen year-on-year growth of around 18-19%. However, incremental credit growth from April to now is around 12%. We are hopeful to retain 18% mark by year end. There are some good opportunities in infra road projects. It currently forms only 2% of our book. We plan to take it to 4%," said M Narendra, CMD, Indian Overseas Bank .

According to A S Bhattacharya, CMD, Bank of Maharashtra ; the bank has opened six mid corporate branches and seven "self help group" branches that specialize only in agriculture loans. His bank has attained 13% incremental growth till now in FY12.

saikat.das@network18online.com