The RBI's decision to increase the daily CRR maintenance requirement from 90% to 99% will have a limited impact on banks’ net interest margins, says a Jefferies report. The move could withdraw up to Rs 800 billion in liquidity.
The Reserve Bank of India’s (RBI) decision to increase the daily Cash Reserve Ratio (CRR) maintenance requirement is expected to have a limited impact on banks’ net interest margins (NIMs), while potentially withdrawing Rs 400 billion to Rs 800 billion from the banking system, according to a report by Jefferies.
Impact on Liquidity and Costs
The report said the move is in line with the Monetary Policy Committee’s shift towards a stance of “calibrated tightening”. Under the revised rules, banks must maintain 99 per cent of the prescribed CRR daily, up from the earlier requirement of 90 per cent. The statutory CRR remains unchanged at 3 per cent of Net Demand and Time Liabilities (NDTL).
The higher daily requirement could prompt banks to keep more funds with the RBI, reducing the liquidity available for lending and other uses. “If this lifts balances by 5-10%, it can withdraw Rs400-800bn of liquidity & add 1-2bps to cost of funds,” the Jefferies report said.
Effect on Profitability and Borrowers
The brokerage noted that banks currently maintain a buffer above the minimum daily CRR requirement. However, the revised norms could require them to set aside more funds with the central bank, increasing their funding costs by 1-2 basis points.
Despite the potential impact on liquidity, Jefferies expects the effect on banks’ profitability to remain limited. Banks may also pass on the marginal increase in funding costs to borrowers, depending on lending conditions and their ability to adjust interest rates. “It's a small dilution of NIMs & banks may be able to pass to borrowers,” the report said.
The impact could also extend to non-banking financial companies (NBFCs) and corporates if banks pass on higher funding costs through lending rates. The extent of the impact will depend on banks’ funding strategies, loan pricing and borrowers’ ability to absorb higher costs.
Analyst Preference: Banks Over NBFCs
Jefferies said it prefers banks over NBFCs in a rising interest rate environment, citing differences in their funding structures and ability to manage higher borrowing costs. “In a rising rate period, we prefer banks over NBFCs,” the report said.
Overall Outlook
Overall, the revised CRR requirement could marginally tighten liquidity in the banking system and increase lending costs, but the immediate impact on banks’ margins is expected to remain limited. The extent to which banks pass on the additional costs to borrowers will be key to determining the impact on credit demand, NBFC funding and corporate borrowing costs. (ANI)
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