The reduction in CRR by RBI will enable banks to ease liquidity, earn interest income on extra available fund via credit creation/investment, and reduce their interest expense/cost of funds marginally. RBI has also increased the provisioning norm by 75 bps on restructured standard accounts leading to a higher credit cost.

''We expect neutral impact of these two measures on banks' profitability as higher provisioning buffer imposed by RBI would be largely offset by the interest earned on extra available fund for credit creation,''  said CARE Research.

The 25 bps CRR cut by RBI has left the rate at its record lowest level since FY03, leading to a release of around Rs 175 billion funds in banking system.

CARE Research expects banks profitability to improve by around 2-3% on the assumption of all fund are being used for credit creation and 10.41% interest rate. Also, the additional available fund will curb banks' borrowing from repo window/call market which would help lowering the interest expense/cost of funds

In an attempt to ensure financial stability and mirror the global best financial practices, RBI increased provision requirement by 75bps on standard restructured assets.

CARE Research said, ''We believes that this a first step towards up-scaling the provisioning norms up to 5% in a phased manner over two years as proposed by a working committee constituted by RBI & chaired by B. Mahapatra in September 2012''.

CARE Research estimates incremental provisioning norms to impact the profitability by around 1.75-2.75% and net worth by around 27bps.

CARE Research said, ''We estimate higher provision requirement to impact PSU banks more significantly than private banks due to rapid rise in their restructured assets. PSU banks have restructured around Rs 400 billion in 1QFY13 and lead the current pipeline of restructuring''.

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