ICICI bank, SBI to be affected most by CRR hike says analyst

The inflation is running at a three-year high and the interest rates are also at the highest in six years. To control the inflation the Reserve Bank of India (RBI) on April 17 said that it will raise the cash reserve ratio (CRR). On the other hand banks are already facing slower loan growth as the interest rates are high due to which there has been fall in the earnings and returns have fallen by 1 percent to 2.7 per cent.

The statement released by the central bank in Mumbai on April 17 stated CRR will be raised to 8 per cent from 7.4 per cent in two phases by May 10. The central bank said the increase, the first in 2008, would drain as much as Rs 18,500 crore from the financial system.

According to a Goldman Sachs Group report the nation’s two biggest banks State Bank of India (SBI) and ICICI Bank, will be affected most by the central bank’s decision to increase the amount of cash they must hold with it.

On April 18 Goldman analyst Sampath S K Kumar had written in a note to clients, “ICICI Bank is likely to be the most impacted by this change followed by State Bank of India and other state-owned banks.”

ICICI bank is more dependent on large deposits that come with higher interest rates so the average cost of the funds is much higher than the most state-run banks. The State-run banks have lower cost deposits from retail savers.

According to information available on the websites of the banks low-cost deposits, which consist of current and savings accounts, comprise 27 per cent of ICICI Bank’s deposits and 39.45 per cent of State Bank’s.

To review the monetary policy the central bank is holding a meeting on April 29. In the year through March 2008, the loan growth has slow down to 21.6 per cent from 28.1 per cent a year earlier as consumers have postponed purchases of automobiles and homes because of higher interest rates.