The recent reduction in bank's reserve ratios has increased consumer financing by India's largest banks.
The State Bank of India, India's largest bank, said the cut in reserve ratios to an eight-year low last week by the Reserve Bank of India (RBI) will allow banks to cut costs for buyers of cars and homes. Punjab National Bank, the third largest bank, has already cut its rates on housing and car loans while Oriental Bank of Commerce and Dena Bank reduced rates on loans to individuals.
The decrease in the reserve ratio is expected to free some US$11 billion at banks, helping spur growth in India's US$1.8 trillion economy that’s growing at the slowest pace since 2009.
The drop in the amount of cash required to be set aside by 25 basis points to 4.5% will ease interbank borrowing costs already at the lowest since 2010. RBI has cut lenders’ reserve requirements by a total 150 basis points, or 1.5 percentage points, this year, releasing some US$19 billion.
The central bank added US$26 billion via open-market purchases of sovereign debt so far in 2012 and freed an estimated US$12 billion in July by allowing banks to lower their mandatory bond holdings.
Improved funding availability is helping banks respond to Finance Minister Palaniappan Chidambaram’s call for reductions in borrowing costs to arrest the massive slowdown in the economy.
Annual gains in bank lending improved to 16.9% in August from a two-year low of 15.6% in February, according to RBI.
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