"This would release more funds into the banking system that were previously held as reserves without generating any interest income to the banks," the report notes.
Based on the Sri Lankan rupee deposits at the end of Financial Year 2013 Quarter 1, according to NDB analyst the report estimates around Rs 45 billion would be released into the system and the infusion to the broad money supply overtime could be six times considering the multiplier effect.
The SRR is the percentage of local currency deposits that the Licensed Commercial Banks (LCBs) have to maintain with the Central Bank of Sri Lanka.
The report further notes that the banking sector profitability will have a favourable impact and that the lending capacity of the banking sector will improve with the expansion of the interest earning asset base.
"The increase in interest income without an increase in interest expenses is likely to improve net interest margin as well" NDB Stock Brokers note adding that they forecast a profit growth of 5% for Financial Year 2013 for the banking sector from their previous forecast of 2%.
They further note that they expect CBSL to refrain from further loosening policies in 2013 in pursuit of stability in macro-economic variables of the country.
Last time when Central Bank increased its SRR in 2011 another stock broking house pointed out that Sri Lanka's Licensed Commercial Banks (LCBs) may lose Rs 1.4 billion worth revenue due to Central Bank's increase of the Statutory Reserve Ratio (SRR) by one per cent.
Back in April 2011, in its Monetary Policy Review for April 2011, the Monetary Board of the Central Bank of Sri Lanka (CBSL), tightened its monetary policy, in a bid to control inflation, by increasing the Statutory Reserve Ratio (SRR) by 100 basis points (bps) to 8%, from the reserve week commencing 29 April 2011.
Based on deposit balances of local Licensed Commercial Banks as at 31 December 2010, which consists of over 90% of the banking sector assets, the additional one per cent of deposits was estimated to be Rs 19.2 billion.
As the fund maintained with the Central Bank does not generate a return, the incremental loss in revenue to these local LCBs is estimated to be Rs 1.4 billion according to banking analysts (based on one year T-Bill rate of 7.53% for 2011).