 "Base rate cut by banks to impact margins by 10-15 bps")
State Bank of India (SBI) and Andhra Bank have become the first lenders to reduce their base rate after the Reserve Bank of India (RBI) cut the repo rate further by 50 basis points (bps) on Tuesday. While SBI has reduced its lending rate by 40 bps to 9.30 per cent, Andhra Bank has taken a cut of 25 bps and brought down the base rate to 9.75 per cent.
With the banks reducing their base rate, there is likely to be some impact on the net interest margin (NIM) in the coming quarters. The pressure on it will depend on the quantum of rate cut by each bank; most analysts broadly expect it to be in the range of 10-15 bps in the third quarter of this financial year.
“In the past six-nine months, deposit rates have come down by 75-100 bps. And therefore, since the cost of funds have been coming down for the banks, the impact on margins as a reduction of base rate will be limited,” said Vaibhav Agrawal of Angel Broking.
SBI’s Deputy Managing Director and Chief Financial Officer Anshula Kant said the 40 bps reduction in the base rate would put pressure on NIM. The effect on margins is likely to be in the tune of 10-12 bps. The bank hopes to compensate this through higher interest income from rise in credit and gains from fall in yields on bonds. SBI has a portfolio of securities worth Rs 70,000 crore in the available for sale category, which could be churned to for treasury gains. Plus, surplus could be deployed in high-yielding assets.
Apart from reducing the base rate, SBI will also be reducing its deposit rates by 25 bps. The new rates will be effective from October 5. Even Andhra Bank will be cutting its deposit rates. “Bank has been reducing deposit rates in past few months, providing cushion for absorbing revision in base rate. At present, loans worth Rs 10,000 crore are linked to base rate. The savings from cost of deposits is expected to be about Rs 60 crore in the third quarter which will compensate for interest income forgone from base rate cut,” said S K Kalra, executive director, Andhra Bank.
Other lenders such as Kotak Mahindra Bank, Axis Bank and HDFC Bank have also said they would be reviewing their rates soon.
In this calendar year, RBI has reduced repo rate by 125 bps but barring SBI and HDFC Bank, on an average lenders have reduced the base rate by only 30 bps.
In its policy statement, RBI said the slow transmission in rates by banks was mainly on account of mobilisation of deposits at fixed rates with only about 20 per cent of term deposits getting re-priced and competition from small savings schemes where the interest rates are revised only once a year. Apart from this, savings deposit rates of public sector banks remaining unchanged at four per cent since deregulation in October 2011 on account of base rate of banks being mostly determined on the basis of average cost rather than marginal cost, has also led to slower transmission. The regulator has advised banks to move to the marginal cost of funding as it will ensure a faster transmission of rate cut.
Bankers had earlier said the increase in bad loans had been putting pressure on the margins as increasingly the interest-earning assets are slipping into the non-performing class. This, in turn, has deterred banks from cutting loan rates.
Moreover, bankers believe they hadn’t raised rates in the same quantum as RBI in the last round of tightening of rates therefore, the reduction also hasn’t kept pace. “The RBI raised rates by 75 bps; we only raised it by 30 bps. When the RBI brought it down by 75 bps, we brought it down by 30 bps. So for us, the transmission was complete. We never brought it up, so where was the question of bringing it down further,” said Arundhati Bhattacharya, chairman, SBI.
However, now with the repo rate down by 125 bps in this calendar year banks are expected to reduce their base rate further.
Bank of India Managing Director and Chief Executive M Rego said the public sector lender has decided to reduce its base rate, benchmark to price loans, by 25 basis points from 9.95 per cent to 9.7 per cent. The new rate will come into force from October 5 this year. The bank will review interest rate on term deposits soon.
With the banks reducing their base rate, there is likely to be some impact on the net interest margin (NIM) in the coming quarters. The pressure on it will depend on the quantum of rate cut by each bank; most analysts broadly expect it to be in the range of 10-15 bps in the third quarter of this financial year.
“In the past six-nine months, deposit rates have come down by 75-100 bps. And therefore, since the cost of funds have been coming down for the banks, the impact on margins as a reduction of base rate will be limited,” said Vaibhav Agrawal of Angel Broking.
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Bankers believe that from here on, a minimum of 25 bps reduction in rate cut is expected. Base rate is the benchmark rate to which all other lending rates are linked.
SBI’s Deputy Managing Director and Chief Financial Officer Anshula Kant said the 40 bps reduction in the base rate would put pressure on NIM. The effect on margins is likely to be in the tune of 10-12 bps. The bank hopes to compensate this through higher interest income from rise in credit and gains from fall in yields on bonds. SBI has a portfolio of securities worth Rs 70,000 crore in the available for sale category, which could be churned to for treasury gains. Plus, surplus could be deployed in high-yielding assets.
Apart from reducing the base rate, SBI will also be reducing its deposit rates by 25 bps. The new rates will be effective from October 5. Even Andhra Bank will be cutting its deposit rates. “Bank has been reducing deposit rates in past few months, providing cushion for absorbing revision in base rate. At present, loans worth Rs 10,000 crore are linked to base rate. The savings from cost of deposits is expected to be about Rs 60 crore in the third quarter which will compensate for interest income forgone from base rate cut,” said S K Kalra, executive director, Andhra Bank.
Other lenders such as Kotak Mahindra Bank, Axis Bank and HDFC Bank have also said they would be reviewing their rates soon.
In this calendar year, RBI has reduced repo rate by 125 bps but barring SBI and HDFC Bank, on an average lenders have reduced the base rate by only 30 bps.
In its policy statement, RBI said the slow transmission in rates by banks was mainly on account of mobilisation of deposits at fixed rates with only about 20 per cent of term deposits getting re-priced and competition from small savings schemes where the interest rates are revised only once a year. Apart from this, savings deposit rates of public sector banks remaining unchanged at four per cent since deregulation in October 2011 on account of base rate of banks being mostly determined on the basis of average cost rather than marginal cost, has also led to slower transmission. The regulator has advised banks to move to the marginal cost of funding as it will ensure a faster transmission of rate cut.
Bankers had earlier said the increase in bad loans had been putting pressure on the margins as increasingly the interest-earning assets are slipping into the non-performing class. This, in turn, has deterred banks from cutting loan rates.
Moreover, bankers believe they hadn’t raised rates in the same quantum as RBI in the last round of tightening of rates therefore, the reduction also hasn’t kept pace. “The RBI raised rates by 75 bps; we only raised it by 30 bps. When the RBI brought it down by 75 bps, we brought it down by 30 bps. So for us, the transmission was complete. We never brought it up, so where was the question of bringing it down further,” said Arundhati Bhattacharya, chairman, SBI.
However, now with the repo rate down by 125 bps in this calendar year banks are expected to reduce their base rate further.
Bank of India Managing Director and Chief Executive M Rego said the public sector lender has decided to reduce its base rate, benchmark to price loans, by 25 basis points from 9.95 per cent to 9.7 per cent. The new rate will come into force from October 5 this year. The bank will review interest rate on term deposits soon.