Bankers bullish on loan growth, want CRR to remain unchanged

The Reserve Bank of India (RBI) will meet bankers on Monday to take stock of the current macro-economic situation and take note of bankers’ views on asset quality and credit growth. The meeting, a precursor for the central bank’s annual policy announcement scheduled later this month, will be attended by the central bank deputy governors and heads of major banks of the country.

Bankers are bullish on credit growth in the current financial year. Loan growth in the previous financial year dropped to around 16 per cent, lowest in several years. However, for 2010-11, bankers feel loan pick up will be far better than the previous one.

Union Bank of India, for example, which has clocked 23.3 per cent growth in credit in 2009-10, sees loans to grow by 25 per cent in the current year.

“We anticipate credit to pick up in the current financial year. As Indian companies have reached full capacity utilisation, they will now invest to expand their capacities,” said M V Nair, chairman and managing director of Union Bank of India.

Union Bank of India, which hiked deposit rates twice in 2010, has explained the move to garner retail deposits in order to fund long-term projects, where it sees robust demand.

Similarly, Bank of Baroda (BoB) and Oriental Bank of Commerce (OBC)also see credit growth to be better in the current financial year. BoB clocked 21.5 per cent loan growth in 2009-10, while for OBC it was 21 per cent.

While loan demand is one factor which has made bankers optimistic, it is hardening of bond yields which has made them concerned.

Yield on the benchmark 10-year government bond which is close to 8 per cent, may further rise if the central bank wishes to suck out liquidity from the system by hiking the cash reserve ratio (CRR). Hardening of bond yields results in banks booking loss on their bond portfolio, putting pressure in their bottomline.

“We expect RBI not to increase cash reserve ratio in the annual policy. An increase in CRR will put further pressure on the bond yields. The RBI may act on the repo and reverse repo front to indicate hardening of interest rates,” said a senior executive from a public sector bank.

Monetary tightening by RBI and the pressure of a higher government borrowing programme are expected to push yields further up in the first quarter. The government plans to borrow Rs 2,87,000 crore in April-September 2010.

During the fourth quarter of the 2009-10, yields on the benchmark 10-year paper hardened 26 basis points which closed at 7.85 per cent on March 31. Some analysts and bond dealers feel bond yields may go up to 8.25 per cent, assuming CRR is hiked 100 basis points and policy rates are hiked by 150 basis points. CRR is the proportion of deposits that banks should keep with the central bank.

A hike in CRR will put pressure on the banks to increase lending rates but it is not clear if they will be able to afford to hike interest rates at this juncture.

The first quarter of the financial year, in which loan demand is slack, may compel banks not to hike loan rates. In addition, since the new base rate mechanism will kick in from July, some banks have indicated they do not want to change the present benchmark prime lending rate immediately.