In absolute terms, the public sector banking industry will take a hit of over Rs 1,600 crore (Rs 16 billion) on its bottom line next year, with the RBI stopping payment of interest on CRR balance from June 24, following an amendment to the RBI Act.
The public sector banking industry registered a net profit of Rs 26,272.48 crore (Rs 262.72 billion) in 2005-06. Banks are required to keep 5 per cent of their net demand and time liabilities with the RBI in the form of CRR.
They do not earn interest on the entire cash balance, and the RBI has been paying 3.5 per cent interest on cash balance above 3 per cent and up to 5 per cent. Inter-bank borrowings, even though part of banks' NDTL, are not subjected to CRR.
A brokerage house has estimated that the abolition of interest payment on CRR will shave off 4.5-5 basis points from the banks' net interest margins in FY07 and around 6 basis points in FY08.
One basis point is one-hundredth of a percentage point. The impact will be less if the RBI brings down the CRR. With the amendment to the RBI Act, the floor level of banks' CRR, which was kept at 3 per cent, has been abolished.
Annual reports of 25 of 27 public sector banks show that they had a balance of over Rs 1,20,000 crore (Rs 1200 billion) with the RBI as CRR in 2005-06.
The State Bank of India, the country's largest commercial bank, had a cash balance of Rs 19,572 crore (Rs 195.72 billion), followed by Canara Bank (Rs 7,285 crore), Bank of India (Rs 5,304 crore), Union Bank (Rs 4,190 crore) and Oriental Bank of Commerce (Rs 3,943 crore).
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