State Bank, ICICI will be worst hit by CRR hike, says Goldman

Mumbai: State Bank of India (SBI) and ICICI Bank Ltd, two of the nation’s biggest banks, will be worst hit by the Reserve Bank of India’s (RBI) decision to increase the amount of cash they must hold with it, a Goldman Sachs Group Inc. analyst said in a report.

RBI said on 17 April it would raise the cash reserve ratio (CRR) to tackle inflation, which is running at a three-year high. Banks, which are already facing slower loan growth with interest rates at a six-year high, will see earnings and returns fall by 1-2.7%, the analyst said.

“ICICI Bank is likely to be the most impacted by this change followed by SBI and other state-owned banks,” Goldman analyst Sampath S.K. Kumar wrote in a note to clients on 18 April.

RBI will raise the cash reserve ratio to 8% from 7.5% in two phases by 10 May, according to a statement in Mumbai on 17 April. The increase, the first in 2008, will drain as much as Rs18,500 crore from the financial system, the central bank said.

ICICI Bank’s average cost of funds are higher than most state-run banks as it depends more on bulk deposits that come with higher interest rates. State-run banks have significantly low-cost deposits from retail savers. Low-cost deposits, which consist of current and savings accounts, comprise 27% of ICICI Bank’s deposits and 39.45% of SBI’s, according to information on the websites of the banks.

“This inter-meeting hike in the cash reserve ratio has increased the probability of further policy action by RBI on 29 April,” Morgan Stanley analyst Tanvee Gupta wrote in a report on 17 April.

“The action could be in form of an additional CRR/reverse repo hike,” Gupta said.

RBI meets on 29 April to review monetary policy. Loan growth slowed to 21.6% in the year through March 2008, from 28.1% a year earlier as consumers deferred purchase of automobiles and homes because of higher interest rates.