Loan yields outpacing banks' cost of funds

The increase in yield on loans of most large banks has been much higher than the rise in cost of deposits, suggesting borrowers are having to bear much more than the firming up of interest rates.

Borrowers, apart from rising interest rates, are also bearing the brunt of costs which banks have to suffer on account of rising loan defaults and higher provisioning, analysts said.

Apart from tightening of prudential norms with regard to sensitive sectors such as real estate, capital markets and personal loans, the Reserve Bank of India (RBI) has also increased provisioning on all good loans in phases to 1 per cent by the end of this quarter from 40 basis points at the end of March 2006.

The increase in the yield on advances of State Bank of India (SBI), the country's largest bank, was 73 basis points at the end of December 2006 from a year earlier, which is over 14 times the 5 basis points increase in its cost of deposits over the same period. Similar is the difference in the increase in yield on loans and cost of deposits of Delhi-based Punjab National Bank

ICICI Bank, the second largest bank and the biggest retail lender, saw its cost of deposits increase by 85 basis points at the end of December 2006 from a year earlier, but its yield on loans rose by a higher 110 basis points during the period. ICICI Bank has seen a sharper rise in its cost of deposits as the share of current and savings account (CASA) balances in its total deposits is still marginal, analysts said.

In the case of SBI, the share of CASA at the end of December 2006 was 43.29 per cent, up from 40.85 per cent a year earlier. Banks do not pay any interest on current account balances, while the RBI has stipulated a 3.5 per cent interest on savings account balances.

ICICI Bank's cost of funds at the end of December 2006 was 6.55 per cent against 5.7 per cent a year earlier. Its yield on advances at 10 per cent at the end of December 2006 were up from 8.9 per cent. SBI's cost of funds were not available, but its cost of deposits rose marginally to 4.57 per cent at the end of December 2006 from 4.52 per cent a year earlier. Its yield on advances rose to 8.6 per cent in December 2006 from 7.87 per cent a year earlier.

The higher increase in yield on advances has ensured that the net interest margins actually rose by 10 basis points to 28 basis points.

Corporation Bank, Syndicate Bank and Oriental Bank of Commerce had to face a greater increase in cost of deposits than their yield on advances, resulting in their net interest margins (NIMs) dropping by up to 70 basis points.

Other banks like Corporation Bank, Allahabad Bank, Vijaya Bank and Union Bank of India also saw their NIMs fall as they were able to increase their yield on advances only marginally compared with the rise in cost of deposits.