Money & Banking
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Credit Policy
Reverse repo rate hike to ease margin squeeze
Suresh Krishnamurthy
THE goal of price stability is seen as the prime reason behind the hike in reverse repo rate. The rate hike, however, could serve to ease the pressure on lending margins of public sector banks that came under pressure in the quarter ended September 2005.
The rate hike would lead to an increase in the borrowing rates for the Government and also indirectly give the banks leeway to hike lending rates to other segments of the economy.
Both would serve to enhance the net interest margins of banks.
Growth in net interest income (excess of interest income over interest expenses) of nine public sector banks averaged only about nine per cent in the quarter under review.
This is in stark contrast to the nearly 32 per cent growth in advances for the banking system.
Net interest income did not rise in tune with volume growth because lending rates have declined.
According to data put out by the Reserve Bank of India, average lending rate in the quarter ended June 2005 was 8-12 per cent.
This represents a decline from the range of 10.50-12.75 per cent for the quarter ended June 2004.
Lending rates have come down even compared to the levels prevailing in the quarter ended March 2005.
The possibility of that pressure easing now has increased.
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