Interest rates on retail loans are unlikely to go down despite the Reserve Bank's decision to cut cash reserve ratio today. CRR is the amount of deposits that lenders must keep with the central bank. The RBI cut the cash reserve ratio by 25 basis points (0.25 per cent) to 4.25 per cent freeing up about Rs 17,500 crore into the banking system.
In September, most lenders had cut retail rates after the RBI cut CRR by a similar 25 basis points. But the current situation is different, analysts said.
The impact of Tuesday's cut in the CRR will be offset by higher provisioning for banks. The central bank has increased the amount of provisioning against restructured loans to 2.75 per cent from 2 per cent effective immediately. RBI's move means banks will have to set aside larger sums for bad loans, which will adversely affect the profitability of lenders. K.R. Kamath, chairman of state-run lender Punjab National Bank, said higher provisioning is likely to impact average net profit of banks by 3 per cent in this fiscal year.
Punjab National Bank had reported a sharp rise in non-performing loans in the September quarter. Among other PSU lenders, Indian Overseas Bank had also reported a sharp rise in NPAs. Analysts said since PSU lenders would have to set aside higher funds for provisioning, chances of a rate cut on the back of CRR reduction looks dim.
Private lenders are unlikely to be significantly affected by the RBI's move to raise provisioning because of better quality assets. However, ICICI Bank, India’s biggest private lender, discounted the possibility of immediate lowering of rates.
"We don't see rates coming down immediately... Just CRR cut is not going to lead to rate cuts. Interest rate reduction moves with cost of funds," Chanda Kocchar of ICICI Bank said at the bankers' press conference post the RBI policy.
However, State Bank of India - India's biggest lender - said may consider lowering rates.
"Our ALCO (asset liability committee) will meet in a day or two... If nothing worrisome we might implement rate cut,” State Bank of India chairman Pratip Chaudhuri said.
(With inputs from Thomsone Reuters)