Good news for banks as RBI hints at easing reserve requirements

RBI Governor, D Subbarao admits banks need relief on reserve requirements to ease liquidity

Even as broking firms have written off investing in public sector banks, there seems to be some light at the end of the tunnel. RBI Governor, D Subbarao, speaking at  a banking conference in mumbai, has said that ‘perhaps’ there was a need to reduce the reserves that banks have to set aside via the cash reserve or statutory liquidity ratios. 
 

Banks block 4% of their cash with the central bank as part of the Cash Reserve Ratio. Banks are also supposed to invest in securities such as government bond to the extent of 23% of their liquid asset as part of the Statutory Liquidity Ratio (SLR).
 

The recent measures by the central bank in order to contain the rupee has tightened liquidity at the hands of banks. Yields on these investments are much lesser than what a bank can get by utilizing the fund by lending. 
 

SBI chief Pratip Chaudhari has been the most vociferous among bank heads asking for a phasing out of CRR. CRR policy has possibly denied the country growth,income and taxes said the chairman while making his argument. 
 

If RBI does relaxes norms of CRR and SLR, not only will the liquidity scenario improve but net interest margins of banks (NIM), which have taken a hit on account of falling interest rates and slower credit and deposit growth will improve. 
 

Recent results point out the growing non-performing assets in the banking sector, especially in public sector banks. This much needed move by RBI can bring back some investor interest in these stocks, which are all trading (except SBI) below their book value, signifying substantial value erosion.