Beena Parmar Moneycontrol News
The interest income of Rs 4,500 crore that banks earned on special bonds and reverse repos helped banks fund the cost of demonetisation, finds an RBI report.
“For an average deployment of about Rs 6 trillion (Rs 6 lakh crore) in a quarter under reverse repos and MSS securities, banks’ net interest income from increased deposits is estimated at about Rs 45 billion (Rs 4,500 crore) in the quarter after demonetisation,” RBI said in its demonetization assessment paper.
The increase in net interest income would need to be adjusted for the cost of managing withdrawal of specified bank notes and injection of new bank notes (such as calibration of ATM machines, staff overtime, security arrangements, lower fees/waiver of fees on digital modes of payments). However, the exact details are not available at this stage, the RBI said.
Banks earned returns of around 6.23-6.33 percent under reverse repo or reverse repurchase of government securities and 6 percent under market stabilisation scheme (MSS) as against the cost of CASA deposits which were around 3.2 percent.
MSS are special bonds floated on behalf of the government by the RBI to mop up the excess liquidity in the system when regular government bonds prove inadequate. These are mostly shorter-tenure bonds of less than six-months maturity. But the tenure differs depending on the requirement.
Reverse repo rate is the rate at which RBI borrows money from banks.
Excess liquidity in the system skews the bond yields and interest rates in the market. Hence, issuance of such bonds stabilises the rates. They also offer interest to banks rather than the holdings under the CRR (cash reserve ratio), which does not offer any interest.
Post-demonetisation, there has been a surge in the current account and saving account (CASA) deposits of banks.
The cost of CASA at 3.2 percent is significantly lower than the weighted average term deposit rate at 7.1 percent.
“Combined with the sharp increase in low cost CASA (current and savings account) deposits, the overall cost of borrowings declined, allowing banks to reduce their lending rates,” RBI said.
Hence, demonetisation also helped banks bring down new loan rates for one-year period by 0.70 percentage points or 70 bps from November to January, over 4 times the reduction in the preceding 7 months.
A bps or basis point is one hundredth of a percentage point.
This comes despite there being no reduction in policy rates by the Reserve Bank of India during the period.
This is significant, considering that the 1-year median MCLR (Marginal Cost of Funds based Lending Rate) declined by only 15 bps during the preceding seven months (April-October 2016) when the policy repo rate was reduced by 50 bps, RBI added.
The weighted average lending rate (WALR) of banks in respect of new loans declined by 56 bps during November 2016-January 2017.
In January, 25 public sector banks reduced their 1-year MCLR in the range of 15 to 90 bps, while 17 private sector banks reduced it in the range of 10 to 148 bps.
During February 2017, six public sector banks lowered their 1-year MCLR in the range of 15 to 65 bps, while six private sector banks reduced in the range of 10 to 50 bps.
During March 1-7, 2017, two private sector banks reduced their 1-year MCLR in the range of 5 bps and 20 bps.
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