Public sector banks could see higher pressure on their net interest margins in the coming months as they have mopped up large amounts of deposits at higher rates and have also effected steep cuts in lending rates between November 2008 and January 2009. NIM is the difference between the cost of funds and the yield on advances.
Analysts said PSBs would get some help from their decision to retire high-cost deposits, but the impact would be limited.
Bank of Baroda has retired high-cost deposits of nearly Rs 3,500 crore (Rs 35 billion), while Allahabad Bank has shed Rs 6,000 crore (Rs 60 billion) worth of such deposits.
"It will take at least two quarters for the low-cost deposits to play out and only then the pressure on NIM will ease," said the deputy CFO of a private bank.
Typically, banks see an immediate impact of lending rate cuts, while the cut in deposit rates comes with a lag as investors don't pull out funds during a falling interest rate regime.
According to the RBI data, between October 2008 and January 2009, PSBs reduced their term deposit rates by 50-150 basis points, while the benchmark prime lending rates were lowered by 150-175 bps. In contrast, private banks cut their lending rates by 50 bps and peak deposit rates by up to 200 bps.
Bankers pointed out that between September and November last year, PSBs such as SBI raised nearly Rs 1,000 crore (Rs 10 billion) on a daily basis by offering up to 12 per cent interest on 1,000-day deposits. In contrast, similar products from private players attracted fewer depositors as they perceived PSBs to be safer.
During the year up to January 2, 2009, deposits with PSBs grew by 24.2 per cent, while private banks saw their growth rate dip to 13.4 per cent from 27 per cent in the year-ago period.
"At a time when rates are falling, these banks are locked up with three-year deposits that cost them 11-12 per cent," said a private bank CEO.
Allahabad Bank CMD K R Kamath acknowledged that margins would be under pressure, but said that was true for the entire banking industry. Compared with September-end, PSBs saw their NIMs rise by 74 bps to 3.24 per cent at the end of December last year.
During the last two quarters, SBI's NIM has stayed at around 3.15 per cent, and is expected to dip marginally to around 3.1 per cent during the fourth quarter, sources said. Though private players such as Axis Bank have also seen a deterioration during the third quarter (see table), they are expecting margins to improve to 3.25-3.50 per cent. Smaller players such as IndusInd Bank, which saw their margins rise by 11 bps to 1.95 per cent during the quarter, are also expecting improvement.
"With rates softening now, private banks are in a better position to manage their NIM during the fourth quarter...," said Bapi Munshi, Axis Bank's treasury head.
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