 "Banks start reducing rate, margins to come under pressure")
State Bank of India (SBI) is the first lender to announce a second base rate cut in two months, in response to the Reserve Bank's repo rate reduction.
After the central bank reduced the rate by 25 basis points on Tuesday, the third such cut since January, SBI announced a base rate reduction of 15 bps, to 9.7 per cent. In April, it had reduced its base rate by 15 bps to 9.85 per cent.
Three more lenders reduced their base rates on Tuesday — Allahabad Bank, Dena Bank and Punjab & Sind Bank. More are expected to follow.
A cut in banks' base rate will lead to a further pressure on their net interest margin (NIM). This is the difference between interest earned on loans and that paid on deposits and is considered a key measure of a bank’s profitability.
“If interest rates come down by 25 bps, the impact on yield is of 10 bps. For the impact of the cut in deposit rates to be reflected on the cost of funds, it takes about six months. As a result, in case if there is an immediate reduction in lending rates, the margins will come under pressure,” said Vaibhav Agrawal of Angel Broking.
SBI recorded a 3.54 per cent NIM in the March quarter and expected it to settle at around 3.5 per cent, chairman Arundhati Bhattacharya told Business Standard on Monday.
RBI Governor Raghuram Rajan, aware that banks will face pressure on their margins, said they should decide if they want to sacrifice these and hold on to market share.
“As interest rates come down in the commercial paper (CP) market, firms are going directly to CP. This is putting pressure on banks to actually cut the rates. Interest rates were coming down even before the first rate cut because of pressure from these other markets. I have no doubt that over time, competition will play a role. Banks will have to figure out. Do they keep the margins right now and lose market share or do they cut their margins and keep market share? That is an age-old problem they will have to address,” he said on Tuesday.
In 2015, RBI has reduced the repo rate by 75 bps but banks have reduced their loan rates by only 15-30 bps.
The central bank said banks' lending rate cuts ought to be in sync with the repo fall. “We expect full transmission from banks for the 50 bps cut already done till this rate cut. Half of it has already happened and we expect full transmission,” said Michael Patra, executive director at RBI, in an analyst conference call.
SBI managing director (corporate banking ) P Pradeep Kumar said the bank wanted to pass on the benefit of repo rate cut to customers.This was the second base rate cut in the current quarter.
On April 7, it had reduced the rate by 15 basis points to 9.85 per cent. As a result of Tuesday's cut, the lender will forgo about Rs 1,100 crore annually on account of a 15-basis point base rate cut. SBI has also reduced the interest rate by 25-50 basis points on short-term deposits. The bank has a very comfortable liquidity situation, with statutory liquidity ratio investments close to 28 per cent.
A cut in lending rate is preceded by a deposit rate cut to ensure the margins are protected. With RBI prodding banks to cut rates, an immediate rate cut or one within this quarter could lead to an impact on margins by five to 10 bps, say analysts.
Banks margins have also been under pressure due to low credit offtake and an increase in bad loans. As a result of the former, the interest earned is low and lenders have to reverse interest incomes booked earlier for bad loans.
After the central bank reduced the rate by 25 basis points on Tuesday, the third such cut since January, SBI announced a base rate reduction of 15 bps, to 9.7 per cent. In April, it had reduced its base rate by 15 bps to 9.85 per cent.
Three more lenders reduced their base rates on Tuesday — Allahabad Bank, Dena Bank and Punjab & Sind Bank. More are expected to follow.
A cut in banks' base rate will lead to a further pressure on their net interest margin (NIM). This is the difference between interest earned on loans and that paid on deposits and is considered a key measure of a bank’s profitability.
“If interest rates come down by 25 bps, the impact on yield is of 10 bps. For the impact of the cut in deposit rates to be reflected on the cost of funds, it takes about six months. As a result, in case if there is an immediate reduction in lending rates, the margins will come under pressure,” said Vaibhav Agrawal of Angel Broking.
SBI recorded a 3.54 per cent NIM in the March quarter and expected it to settle at around 3.5 per cent, chairman Arundhati Bhattacharya told Business Standard on Monday.
RBI Governor Raghuram Rajan, aware that banks will face pressure on their margins, said they should decide if they want to sacrifice these and hold on to market share.
“As interest rates come down in the commercial paper (CP) market, firms are going directly to CP. This is putting pressure on banks to actually cut the rates. Interest rates were coming down even before the first rate cut because of pressure from these other markets. I have no doubt that over time, competition will play a role. Banks will have to figure out. Do they keep the margins right now and lose market share or do they cut their margins and keep market share? That is an age-old problem they will have to address,” he said on Tuesday.
In 2015, RBI has reduced the repo rate by 75 bps but banks have reduced their loan rates by only 15-30 bps.
The central bank said banks' lending rate cuts ought to be in sync with the repo fall. “We expect full transmission from banks for the 50 bps cut already done till this rate cut. Half of it has already happened and we expect full transmission,” said Michael Patra, executive director at RBI, in an analyst conference call.
SBI managing director (corporate banking ) P Pradeep Kumar said the bank wanted to pass on the benefit of repo rate cut to customers.This was the second base rate cut in the current quarter.
On April 7, it had reduced the rate by 15 basis points to 9.85 per cent. As a result of Tuesday's cut, the lender will forgo about Rs 1,100 crore annually on account of a 15-basis point base rate cut. SBI has also reduced the interest rate by 25-50 basis points on short-term deposits. The bank has a very comfortable liquidity situation, with statutory liquidity ratio investments close to 28 per cent.
A cut in lending rate is preceded by a deposit rate cut to ensure the margins are protected. With RBI prodding banks to cut rates, an immediate rate cut or one within this quarter could lead to an impact on margins by five to 10 bps, say analysts.
Banks margins have also been under pressure due to low credit offtake and an increase in bad loans. As a result of the former, the interest earned is low and lenders have to reverse interest incomes booked earlier for bad loans.