Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Banks: The interest hike effect... - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Apr 19, 2005

    Banks: The interest hike effect...

    Amidst bearish sentiments in the markets, the news of banks hiking their corporate lending rates has kept investors wary of investment in equities for the past few trading sessions. While the PLR rates do not change, the spread that the 'AAA' corporates enjoy due to the banks offering them 'sub-PLR' rates, will now shrink. Banks that were quoting interest rates on an average 3% below PLR (approx: 7.5%) are now expected to offer loans at PLR less 2.5% (i.e. above 8%).

    The yield on 10-year benchmark G-Sec has once again risen to 7.2% in April 2005, after touching a low of 6.4% in February 2005. While the said rate has amplified over 40 basis points over last year, banks are envisaging a hike of 25 to 50 basis points in their corporate lending this quarter (1QFY06). This is because the loan market has to adjust itself to the rising yields in the bond market, otherwise there will be arbitrage opportunity with all corporate borrowers securing loans for investment in bonds.

    What does this mean for the banks?
    The rise in interest rates definitely augurs well for the banks' net interest margins (NIMs), as this will improve the yield on advances. But this is on the assumption that the banks can retain their corporate loan portfolios at the current levels. Bank credit grew by 30% in FY05 with the total outstanding being Rs 11,417 bn at the end of FY05. Corporate lending, which comprises about 65% of the total non-food credit disbursements, has grown at a faster clip during 3QFY05. However, one must note that the YoY growth in corporate lending has been negative over the years, with banks finding it more lucrative to concentrate on the retail segment.

    This is also due the fact that the retail segment has lower risk weightage associated with it. Thus going forward, the shift of portfolio from corporate to retail segment is not unforeseen and considering this the ' interest rate hike benefit' is not going to be very significant. Also, it must be recollected that the banks have had to hike their deposit rates in the recent past, which has taken a toll on their cost of funds. The interest rate hike can thus be viewed as 'passing on' of costs to the consumers.

    Going forward, the growth in credit is expected to be very healthy in the current fiscal also, thereby putting a pressure on liquidity. With the government's borrowing programme of Rs 830 bn in 1HFY06 being 41% higher than that of the past year, it is feared that even the liquidity of Rs 600 to 700 bn currently in the system may dry up. Interest rates therefore continue to remain subjected to the vagaries of money supply, undoubtedly with an upward bias. Whether the banks can pass it on to their customers every time or not is a matter of concern, on which rests the sector's fortunes.



    Equitymaster requests your view! Post a comment on "Banks: The interest hike effect...". Click here!


    More Views on News

    IDFC Bank: Strong Trading Income Shields Credit Slowdown (Quarterly Results Update - Detailed)

    Aug 10, 2017

    IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.

    ICICI Bank: Loan Slippages Trending Downwards (Quarterly Results Update - Detailed)

    Aug 10, 2017

    Asset quality will be the key thing to watch out for going forward.

    Axis Bank: Outside Watchlist Slippages a Big Worry (Quarterly Results Update - Detailed)

    Jul 31, 2017

    Almost 74% of the watchlist as provided by the bank of Rs 226 billion in FY16 has turned into non-performing assets.

    Should You Take SBI Chief's Advice and Load up on SBI Shares? (The 5 Minute Wrapup)

    Jul 6, 2017

    Does the stock score on the value versus price equation?

    AU Small Finance Bank Ltd. (IPO)

    Jun 27, 2017

    Should one subscribe to the IPO of AU Small Finance Bank Ltd?

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 21, 2017 03:37 PM