Summary
- Banks get a little gain in FY07, and going forward — The RBI made a few changes to the returns it offers to banks on their CRR balances. This should add about 5bp in margins for FY07 (back-ended in 4Q07), and about 3bp going forward, across the sector. Supports profitability, to a limited extent.
- But, CRR remains a fundamental drain on bank profitability — Raised returns do not materially change the drain that is the CRR. We estimate an opportunity cost, and effective loss, of 55-60bp of margin for banks. This is estimated at current market rates, and the increased returns only provide an offset of about 3bp.
- Two changes - retrospective and prospective — RBI had announced 0% returns on CRR in June 06. Since the notification has only been effected in January 07, RBI is a) Compensating banks over the June – Feb 07 period, at a higher rate (350-200bp) level; b) Raising returns from 0% to 1%, prospectively. The effective yield for banks is substantially lower – they do not get any returns on the first 3% of CRR, and so effective returns are only 0.5% on 6% CRR assets.
- The concession – Likely driven by rising P&L impact of CRR — We would believe RBI has made a slight concession to its June 06 change as the financial impact of the CRR has increased since June 06 as a) CRR itself has been raised to 6% from 5% since; and b) the cost of funding the CRR has risen by 150-200bp since. This is only a mild concession, but potentially reflects some cognizance of onerous regulatory requirements on the banking system.
- Positive, but only a mild one — This does come as a slight positive for banks – private and Government, against a slew of more onerous regulatory developments in the recent past. However, not structural or meaningfully directional.