The hike in the prime lending rates should help PSU banks maintain their margins .
Over the last fortnight most public sector banks have increased their prime lending rates (PLR) by 50-100 basis points. State Bank of India, for instance, has opted to raise its PLR by as much as100 basis points while upping deposit rates by 50-75 basis points.
The latest round of hikes, which has been accompanied by an increase in the deposit rates in many cases, should help support the net interest margins of banks.
What prompted the rate hike was the increase in the repo rate –the rate at which the central bank lends to banks—by 50 basis points at the end of July.
Besides, the central bank had asked banks to set aside a larger share of their deposits in the form of cash, which earns the banks practically nothing. Private sector banks had upped their lending rates soon after the central bank’s announcement .
The hike in the PLR may dampen the demand for credit with individual borrowers now clearly feeling the pinch. The demand from companies continues to be reasonably strong and as such banks may lend just about 20 per cent more in FY09 compared with FY08 during which credit had grown by about 30 per cent.
That would be in line with the central bank’s wishes; it would prefer that credit doesn’t grow too much beyond that level. However, the demand for money could be somewhat lower in FY10.
This anticipated moderation in credit has led banks to restrict the hike in deposit rates and that should help them to maintain if not increase their margins sequentially in the September quarter.
Earlier in the year many banks had actually dropped lending rates which had depressed margins somewhat in the March quarter. The BSE has fallen about 37 per cent since the start of 2008 while the Sensex has come off by about 26 per cent. Valuations of PSU bank stocks are down sharply —-they are now trading in a range of 1-1.4 times estimated FY09 price to book value.
While the expected deterioration in the quality of retail assets appears to have been priced in, a worsening in the quality of corporate assets has probably not been fully factored into the prices.
