The Hindu Business Line : Net interest margins of banks set to decline

Bangalore, March 26 Net interest margin (NIM) of the banking sector is expected to show a marked deterioration on the back of slowdown in credit offtake.

The NIM is the difference between banks’ interest earnings and interest expenditure. Public sector banks’ average NIM for the financial year 2006-07 was 2.7 per cent. Private sector banks’ NIM last year was 2.4 per cent.

Steady drop

In fact, NIMs have dropped consistently since 2002-03. But this year, bankers said one of the major factors causing the deterioration was the slowdown in credit offtake. Credit offtake till April 2007 till mid March this year financial year was Rs 3.22 lakh crore, according to the weekly statistical supplement of the Reserve Bank of India. During the corresponding period of the last financial year the figure was Rs 3.4 lakh crore.

During the same period, investments, by banks were Rs 1.97 lakh crore, as against Rs 85,298 crore. The shift to investments largely was on account of the shortfall in credit offtake, bankers said.

Interest income for banks comes from both coupon flows (interest earned from government securities and corporate debt securities) and advances. Government securities comprised 98 per cent of banks’ investments this year. Average yield for government securities was likely to be in the range of a 7.8-8 per cent, bankers said.

Yields on advances were expected to be in the region of about 10 per cent, well below the benchmark prime lending rate by at least 200 basis points. One reason for the drop was that many corporates had pushed for better pricing, with some actually shifting to external commercial borrowings, taking advantage of the rupee’ appreciation and lower dollar interest rates.

Bulk deposits

Besides, this year banks had offered high interest rates for corporate bulk funds. With the high rates on offer, deposits grew Rs 4.72 lakh crore till mid March this year as against Rs 3.82 lakh crore in the corresponding period of the last year. Corporate bulk fund rates this year were raised to rates as high as 12 per cent also, bankers said.

Moreover, attempts to raise low cost resources had not yielded big results due to competition from postal savings and mutual funds. Low cost resources included current and savings account deposits.

The weighted cost of these funds is currently about 3 per cent. This resource base comprised barely 25 per cent of gross deposits. The remaining came from time deposits that also included corporate bulk deposits and certificates of deposit.

Bankers said that average cost of these resources during the year was expected to be about 6.5 per cent, in view of the high rates on bulk funds.

With the Cash Reserve Ratio at 7.5 per cent, bankers said that this financial, public sector banks’ NIM was likely to be in region of about 2.4 per cent, and private sector’s at least 10 basis points below that figure.

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