The Hindu Business Line : Rising cost of funds weighs on banks’ net interest margins

Top bankers said that net interest margins (NIM) for most banks, both in the public and private sectors, are likely to be in the region of about 2.2 per cent, or down at least 25 basis points from the first quarter of the current year.

The NIM is the difference between the interest expenditure and the interest costs of banks.

Bankers said the working fund costs pulled down the NIMs in Q2, stemming from tight liquidity conditions prevailing in the financial markets. The average cost of working funds in Q2 was a little over 8 per cent.

This was despite large accretions to the savings deposits of banks during the last quarter.

The increase in the cost of working funds was due to the high rates offered through certificates of deposits during the period. During the first quarter of the current year, CD rates averaged 9 per cent. In the second quarter, CD rates were up by at least 200 basis points, clearly indicative of the increased cost of working funding. Bulk funds comprised at least 30 per cent bank deposits.

Fiat bypassed

Besides, bankers said, many public sector entities bypassed the Finance Ministry’s fiat against inviting bids for bulk deposits through the CD route. CD placements allowed corporates to place deposits with the highest bidders.

This consequently pushed up the cost of the raising bulk resources.

Bankers said, during the second quarter, credit offtake also remained buoyant.

However, few banks were able to pass through the increased cost of working funds.

Instead credit was still priced between 12.5 and 13 per cent.

Most top notch corporates switched to commercial papers or short term debentures for raising funds. Short-term debentures were also priced at about 12-12.5 per cent.

Accordingly bankers said, lending rates to well-rated corporates continued be low. The rates were kept low so as to prevent asset flight when rates drop. Some of the banks said that they absorbed the costs in Q2.

The contraction of NIM in Q2 was also due to the large farm loan write-off. Compensation for farm loan waiver was yet to be passed to the banks.

The farm loan write-off is estimated at Rs 72,000 crore. The reduced NIMs, notwithstanding, profits are unlikely to be impacted, bankers said. The stable net profits stemmed from the softening yields.

The cut-off yield for the second quarter was 8.65 per cent or down 5 basis points from the previous quarter. Lower yields implied lower depreciation provisions.

Simultaneously, bankers said the lower valuation provided leeway for some write-back of excess depreciation.

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