X

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.
Will these banks yet again 'sacrifice' NIMs? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jul 5, 2013

    Will these banks yet again 'sacrifice' NIMs?

    The Indian banking sector is reeling under the pressures of low credit growth with poor assetquality. While the bad loans have resulted in asset quality woes, the laggard credit and deposit growths have been particularly worrying. In this backdrop, the Finance Minister has urged the lenders to reduce their lending rates and pass on the benefits to the end consumers. Not that all banks are prompt in paying heed to such mandate. But for a few it is a question of when as against whether to do so.

    Why is the government insisting on rate cut?

    The Reserve Bank of India (RBI) has reduced the repo rate or the short-term lending rate by 1.25% since January 2012. But the lenders have passed on only 0.30% to consumers. When the regulator calibrates its short-term lending rates, it is expected that the monetary transmission (passing on of rate cut benefits) should take place with banks reviewing their lending rates too. Moreso, the Finance Ministry believes that the banks should be increasing lending to the productive sectors of the economy to prop up growth and investments. The economic growth rate has been sagging at decade lows of 5% in 2012-13 and credit-offtake has remained subdued. The credit growth was seen down to 15.6% in 2012-13 from 17.8% a year before.

    The government has been particularly keen on monetary policy rate transmission by the lenders. However, lenders are facing their own set of issues. Bankers do not see any headroom to cut either lending or deposit rates despite the repo rate cuts by RBI on account of tight liquidity conditions that have kept the cost of funds elevated. The higher inflationary levels have ensured higher costs of deposits. Any further rate reduction would take a toll on the banks' net interest margins (NIMs). Moreover, the scope of lending rate cut gets difficult further with the lagged deposit growth in the system that has not improved significantly. The deposit growth has been hovering around 14% levels for major part of 2012-13. This restricts banks to reduce deposit rates and bring down their costs of funds. While both SBI and Bank of India (BoI), for instance, have already tinkered with cut in deposit rates to balance their asset-liability portfolio; flight of deposits forced them to reverse the rate cuts.

    While few banks have responded to the push, others have remained reluctant. The country' s largest lender, State bank of India (SBI), for instance, preferred to maintain a status-quo since the base rate of the bank already stands lowest in the industry at 9.7%. This leaves very little headroom for transmission. The average base rate of all other banks fall in the range of 10.2%-10.25% and are expected to re-align their base rates with that of SBI.

    Source: Banks' presentations

    Additionally...the rate cut may worsen asset quality woes!

    Further forcing banks to reduce lending rates and clear stalled projects would only add to the rising non-performing assets (NPAs) and in turn hurt profitability. The NPAs for PSU banks are nearly twice the size of NPAs of the private sector lenders, primarily due to exposure to unviable public sector projects. While the private banks shy away from lending to the long-gestation projects and the government projects, PSU banks are compelled to do so. Therefore, the renewed push by Ministry to cut lending rates would only worsen the situation.

    The PSU banks, therefore have the maximum likelihood of facing the brunt arising out of the rate cut coercion. Private lenders may relatively hedged given their independence in pricing loans according to the inflation scenario and risks to asset quality.

      Shweta Daptardar-Mane, has an MBA (Finance) degree and over five years of equity research experience. She passionately tracks the Banking and Finance industry and follows the macro developments in the economy, particularly the central bank monetary policy. She is deeply inspired by not only Buffett's investment acumen, but also by his infectiously charismatic, down-to-earth persona. Shweta is the contributor to our large cap franchise, StockSelect.

     

     

    Equitymaster requests your view! Post a comment on "Will these banks yet again 'sacrifice' NIMs?". 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

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    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.

    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.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    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

    S&P BSE BANKEX


    Aug 18, 2017 (Close)

    S&P BSE BANKEX 5-YR ANALYSIS

    COMPARE COMPANY

    MARKET STATS