Cut in CRR needed to benefit borrowers

Refinancing pressure prevents borrowers from benefiting from government rate cuts.

India Ratings said banks will find it difficult to pass on the benefits of a rate cut by the Reserve Bank of India, the central bank, as borrowers remain under refinancing pressure.

It believes only a reduction in the cash reserve ratio or CRR can help banks cut lending rates and thus aid effective monetary policy transmission.

CRR is the amount of funds banks have to keep with the RBI. If the central bank decides to increase the CRR, the amount of money available to banks is reduced. RBI uses the CRR to drain excessive money from the banking system.

"Monetary easing is more likely to be driven by a cut in the cash reserve ratio (CRR) than a reduction in the repo rate, which will enable banks to offset the impact of a base rate reduction on earnings, as they continue to face refinancing pressure due to higher deposit rates," said India Ratings.

The ratings agency said some private sector banks have not cut their base rates at all, even though the RBI reduced the CRR by 200 bps during this period.

The stunted transmission of monetary easing also stands in contrast to the government bond market, where the 10-year benchmark bond yield has come off by close to 100 bps compared to end-April 2012.

India Ratings and Research Private Ltd is a leading credit rating and research agency.