Banks’ operating environment may improve: Angel Broking

Banks’ operating environment may improve: Angel Broking

The ongoing global financial crisis has led to substantial capital outflows in recent months and this has led to a liquidity crunch in the domestic banking system.

Banks continue to borrow an average of about Rs55,000 crore under the Liquidity Adjustment Facility (LAF) in the past 2-3 days, and call rates, while receding from 16% levels, are still at 10.25%.

Moreover, deposit growth has slowed down to 20%, while credit growth remains strong at 25%, leading to a very high 74% CD ratio for the banking industry.

The RBI is stepping in to provide the domestic banking system with adequate liquidity. Having already cut the CRR by 150bp, the RBI on 15 October announced a further 100bp CRR cut taking it to 6.5%, a move that is expected to release a further Rs40,000 crore into the system.

Further, it allowed banks to borrow an additional 0.5% of their Net Demand and Time Liabilities using their SLR holdings as collateral under the LAF to meet liquidity requirements of Mutual Funds.

The RBI will also release the first installment of Rs25,000 crore under the Agricultural Debt Waiver and Debt Relief Scheme to banks immediately, at the Government’s behest. It also extended the special 14-day Repo facility of Rs20,000 crore that it had earlier announced for Mutual Funds and allowed banks to lend to Mutual Funds against the security of Certificates of Deposits.

Additionally, towards measures for attracting capital inflows into the country, the RBI increased the maximum interest rate that banks can offer on both FCNR (B) and NR(E) RA Deposits by 50bp, from LIBOR minus 25bp to LIBOR plus 25bp and from LIBOR plus 50bp to LIBOR plus 100bp.

All things remaining constant, every 50bp CRR cut can lead to approximately a 3bp improvement in banks’ NIMs and 2% improvement in Return on Assets.

We believe, this will lead to an improvement in the operating environment for banks, apart from providing immediate liquidity relief.