May raise deposit rates further to mop up funds, face pressure on margins.
Even if the Reserve Bank of India (RBI) increases interest rates in the third quarter review of the monetary policy next week, banks will find it difficult to pass on the same to customers. Moreover, stiff competition will keep an upward pressure on deposit rates. Thus, banks, which expect healthy margins in the third quarter, say such levels are unlikely to sustain.
Effective lending rates, be it for home loans or corporate loans, have gone past the double-digit mark. Any further rise may hit demand for credit, banks fear.
“Our lending rates have reached a peak and any further rise may dent credit demand,” said Sumant Kathpalia, head (consumer banking), IndusInd Bank.
Loan disbursement in the fourth quarter of the last financial year was almost 40 per cent of the entire year’s figure. Banks, which had to meet credit growth targets for the quarter, that too over a higher base, would find it difficult to increase lending rates, analysts said.
| TOUGH TIMES | |||
| Bank | Net interest margins (%) | ||
| FY10 | Q1FY11 | Q2FY11 | |
| SBI | 2.66 | 3.18 | 3.43 |
| ICICI Bank | 2.50 | 2.50 | 2.6 |
| HDFC Bank | 4.31 | 4.30 | 4.2 |
| Axis Bank | 3.75 | 3.71 | 3.68 |
| BoB | 2.74 | 2.90 | 3.02 |
| PNB | 3.57 | 3.94 | 4.06 |
Axis Bank, which announced third quarter results yesterday, saw net interest margins (NIMs) increase 13 basis points (bps) to 3.81 per cent, as compared to the second quarter. However, the bank says it will be difficult to hold on to the figure.
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“With the cost of funds likely to increase, one should be prepared for higher costs. So, it is reasonable to expect margins to come under pressure. Going ahead, we expect NIMs of 3.4-3.6 per cent,” said Somnath Sengupta, executive director of Axis Bank.
Despite an increase of around 250 bps over the last three months, deposit rates were yet to reach their peak levels, bankers said. The beginning of the last quarter saw banks go for another round of rate increases. “Banks will have to further increase deposit rates by 25-50 bps this quarter, said Vaibhav Agarwal, vice president (research), Angel Broking.
As a result, some analysts expect more pressure on margins. “Fourth quarter NIMs will be lower by 20 to 25 bps as compared to the third quarter,” said Suresh Ganapathy, head of financial research team, Macquarie Securities.
The ability to withstand the margin pressure will depend on banks’ ability to raise low-cost current account and savings account (Casa )deposits. Banks have already turned their attention to this. Casa deposits are the cheapest source of funds. While the rate for savings accounts has been fixed at 3.5 per cent, no interest is paid on current accounts. “Banks with a higher Casa ratio will fare better on the margin front,” said Agarwal.