The Hindu Business Line : Banks told to bring down net interest margins

Banks are under pressure to bring down NIMs to internationally accepted levels of about 2 per cent. This would be achieved only by holding on to current interest levels, both lending and deposit rates.

C. Shivkumar

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Bangalore, May 12 Banks’ attempts to hold on to high net interest margins (NIMs) have hit a wall of resistance from the Union Ministry of Finance.

Top bankers said that they have been advised by none other than the Union Finance Minister to shrink their NIMs to acceptable levels. Bankers said that the Finance Minister, Mr P. Chidambaram, at a meeting with the chief executives of public sector banks recently, had observed that the existing NIMs were on the high side. NIM is the difference between banks’ interest receipts and interest expenditure.

For the 2007-08 financial year, most PSU banks had reported NIMs in the range of 2.5-2.8 per cent. This was despite high cost of deposits and low credit growth during the period. Besides, the CRR was pushed up to 7.5 per cent. There are no interest receipts on CRR balances.

In fact, banks’ attempts at window dressing their balance sheets have actually boomeranged on them, banking officials said. The bankers admitted that penal interest receipts on non-performing asset recoveries were reported as part of the interest income, instead of other income. Recovery of the principal was credited to the capital account. Bankers said if the penal levies are treated as other income they would be in a position to report lower NIMs.

Banks are now under pressure to bring down NIMs to internationally accepted levels of about 2 per cent. This reduction, bankers said, would be achieved only by holding on to the current interest levels, both lending and deposit rates. Clearly, the implication is that there is unlikely to be any major changes in deposit rates in the near future. In fact, despite the hike in the reserve ratios by 75 basis points, during the last four weeks, few banks have revised their deposit or lending rates. Instead, banks decided to absorb the cost increases. Besides, the softening of Government security yields indicated that future government borrowings would have lower coupons, clearly favouring the government borrowing programme. Government borrowing for the first half of the year is targeted at Rs 96,000 crore or about 66 per cent of the market borrowing target. This is exclusive of borrowings through Treasury bills and placement of bonds for deferred payment of refinery subsidies.

A softening of yields implies a drop in interest incomes from government securities for fresh borrowings.

Already the ten-year yield to maturity has dropped to about 7.85 per cent, a drop of 15 basis points since the beginning of the current financial year. If the yields fall further and the trend in credit growth continues, NIM target would actually be realised, bankers said.

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