Despite Rising Crr, Sbi Can Make More Money On Existing Loans, Experts Say

The Reserve Bank of India raised the repo rate – the rate at which the RBI lends money to commercial banks – by 40 basis points to 4.40% in a sudden move on Wednesday. It also increased the cash reserve ratio (CRR) – the share of total deposits that lenders must keep with the RBI – by 50 basis points to 4.5%. The CRR is increased to control the excess flow of money into the economy as the amount available from lenders to sanction loans decreases.
But despite a rise in CRR, the State Bank of India (SBI) could make more money on existing loans. “The excess liquidity already in the system is almost Rs 5.7 lakh crore as far as I remember,” Dinesh Kumar Khara, chairman of SBI, told CNBC-TV18.

“So I think if 85,000 to 87,000 crore rupees goes away, it won’t have a significant impact on us or any of the banks. If you ask me, the part of the liquidity that’s sucked up like maybe it leads to a situation where the risk will be properly priced because the pricing was not done properly due to excess liquidity,” Khara said, adding that removing excess liquidity from the system will improve loan pricing.

As of 13:24 IST, SBI shares were trading up 1.7% at Rs 487.9 on BSE. The stock gained after three days of consecutive losses and hit an intraday high of Rs 494.1, up 3%.

SBI share price chart (Source: BSE)

Regarding the hike in repo rates, Gaurav Jani, Research Analyst at Prabhudas Lilladher, said: “A calculation on the back of the envelope suggests that it would be more beneficial for Kotak Mahindra Bank than ICICI Bank, followed by HDFC Bank , Axis Bank and State Bank of India.”

Purvesh Shelatkar, head of institutional brokerage at Monarch Networth Capital, said the number of sanctioned loans is unlikely to be affected as demand increases and the rise in the repo rate will help the lender make more money.

“Rising interest rates will give the lender firepower, which will increase their income on existing loans,” Shelatkar said. He said the CRR hike, although intended to control liquidity, will have little impact on SBI or any other major bank because liquidity is already superfluous.

SBI’s Khara also confirmed that the bank does not expect RBI’s decision to impact demand for home loans. “The kind of behavior we’re seeing in the system is that loans are growing faster than deposits,” Khara said.

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Meanwhile, Axis Securities has named SBI as one of its top stock picks for May 2022. The brokerage firm believes this is a good time to increase allocation to top-tier private banks with a view to the next two to three years.

“We have two buys with high conviction in ICICI Bank and SBI, which offer superior growth and a better risk-reward ratio in the current environment. Their assets are also of good quality and the operating matrix of both banks is improving. SBI is a good FY21-24 ROE upgrade story and a good PSU play right now,” said Neeraj Chadawar, Head of Quantitative Equity Research, Axis Securities.

Chadawar believes that in the scenario of rising interest rates, bank stocks tend to perform well. “The RBI is committed to a calibrated tightening by balancing growth and inflation momentum, which means that at this stage the impact of yesterday’s rate hike on credit growth is limited because the underlying growth drivers are intact,” he added.

He is of the view that the banking space could generate decent returns in the current calendar year as the outlook for the sector has improved significantly over the past few quarters. In addition, he said, an increase in capital spending will allow banks to improve credit growth, and the overall increase in fiscal spending in FY23 will help ensure broad-based growth.

“In the global space, top-tier banks are well positioned in terms of overall asset quality and visibility of improvement in the operating matrix. We could see improvement in ROE for top tier banks in the coming years,” Chadawar pointed out.


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