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Banks see margin pressures due to RBI double whammy
May, 04th 2011

The RBI's higher-than-expected rate actions together with a rise in savings rate could put Indian banks in a tight spot as they struggle with higher borrowing costs compounded by the inability to raise lending rates sharply on concerns of moderating loan demand.

The central bank's move saw bankers scrambling to chalk out plans to minimise the impact of the strong monetary and prudential tightening along with a rise in savings bank rate on their margins and profits.

Most banks are planning to raise lending rates very soon to pass on the higher cost of funds, in turn aiding faster monetary policy transmission.

State Bank of India chairman Pratip Chaudhuri sees the sector raising rates by 25-50 basis points in 2-3 months. However, he added, banks will be cautious in passing on the cost increases to customers as it could dampen demand for loans.

"There will be some additional cost to the bank -- some part of that will be offset by raising lending rates and some will be absorbed," said Ashok Dutt, executive director, Dena Bank.

The RBI raised the repo and reverse repo rate by a larger-than-expected 50 basis points to battle a stubbornly high inflation.

It also raised the savings bank deposit rates by 50 basis points to 4% with immediate effect and increased the provisioning requirement on certain categories of non-performing advances and restructured advances.

"Policy rates and savings rate have gone up. So depending on banks, 10-15 basis points impact will definitely happen. Then, there is provisioning requirement on restructured assets," said Chanda Kochhar, managing director and chief executive officer, ICICI Bank.

"And of course we should remember that transmission of the previous rate increases has not fully happened. So these are the 4-5 factors which will lead to increase in lending rates. A large part of the (policy rate) increase will be passed on."

State-run lender IDBI Bank on Tuesday raised its benchmark prime lending rate and base rate by 50 basis points each to 14.5% and 10% respectively due to higher cost of funds.


A senior official at state-run Bank of India said domestic net interest margin is likely to come down by 13 basis points, while its global NIM will take a hit of 10 basis points.

Another mid-sized lender, Union Bank, also sees a 10 basis point impact on NIM, while Bank of Baroda said cost of deposit will go up by 12-15 basis points.

"Naturally, the savings bank cost will have a bearing on the total cost of deposits, and in turn it will result in increase in base rate because base rate is a combination of cost of funds," said N. Seshadri, executive director at Bank of Baroda.

The increase in provisioning requirement is, however, unlikely to have a big impact immediately for banks as most already have higher provisioning that was prescribed by the banking regulator.

The RBI expects banks' advances to grow by 19% in fiscal 2012, lower than 21.4% in the previous year, and pegs deposits growth at 17%.

Credit growth is the biggest and most potent contributor to demand-side inflation and therefore banks -- the largest channel of loan disbursements -- are seen as the most effective tool to manage inflation.

Banks expect credit growth of 18-22% in FY12, with high interest rates impacting demand for loans from customers.

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