Banks to get 5-year CRR relief for lending to auto, housing, MSMEs

While home finance can go for a longer period, and vehicle finance loans can reach seven years, analysts say five years is a good enough window for banks

The Reserve Bank of India (RBI) on Monday said banks would not be required to maintain the cash reserve ratio (CRR) for five years on their deposits for an amount equivalent to loans given to the MSME (micro, small, and medium enterprises), housing and vehicles sectors between January 31 and July 31.
 
Banks currently maintain 4 per cent on their deposits as CRR.
 
In the monetary policy, however, the RBI said it would allow relaxations on this for loans given to the three productive sectors as they could have “multiplier effects to support growth impulses”.
 
Therefore, banks were told that they could carve out an amount equivalent to what they lent to these three sectors in the six months from their total deposit base, and go for five years without maintaining the CRR on that amount.
 
While home finance can stretch over a longer period, and vehicle finance loans can reach seven years, analysts say five years is a good enough window for banks.
 
In this period, the loan portfolios could see a number of resets, as all retail loans are now linked to repo and they need to be reset at least quarterly. This is also forcing transmission in at least one segment of the loan portfolio, something that the RBI has been trying to do for quite some time. The RBI is looking to bring down the cost of funds for banks. 
 
“This, along with long-term repo operation (LTRO) can bring down cost of funds for banks, without lowering deposit rates,” said an economist. The Reserve Bank, in its policy meeting also said banks can avail up to ~1 trillion of liquidity for one and three years at the repo rate.
 
Banks had maintained that they could not lower lending rates if deposit rates were not cut. Lowering deposit rates could make depositors leave banks in search of higher returns elsewhere. Experts say the LTRO is a deposit-like product for banks.
 
Announcing such schemes also has risks for the central bank as the interest rate cycle could turn and rates could go north.
 
“Even if banks take the money from LTRO, or even the savings that come from CRR exemptions, and put the money in corporate bonds, that’s a form of lending and should help the economy,” said an economist requesting anonymity.
 
Importantly, economists say, if needed, RBI can increase such CRR relaxations and LTRO operations.
 
Facts of the matter
 

• Relaxations on MSME, housing and vehicle loans made in view of their ‘multiplier effects’
• Idea is to bring down cost of funds without deposit cuts, say analysts
• RBI can theoretically extend the unconventional measures till growth revives