The Hindu Business Line : Net interest margin may see moderation

Public sectors banks seem to have taken the first steps towards reducing interest rate regime by agreeing to cut their prime lending rates. Bank of India, State Bank of Bikaner and Jaipur and Syndicate Bank have cut their lending rates by 75 basis points over the past two days. (For every 75 basis point cut, borrowers may have to pay Rs 750 a year less for every lakh borrowed.)

Other banks are expected to follow suit. In the last week of October, following the RBI’s various liquidity easing measures, a few banks such as Punjab National Bank, IDBI Bank, United Bank of India and Union Bank of India had already cut rates by 50 bps.

This was preceded by a 150 bps cut in the repo rate by the RBI.

The prime lending rate is the rate at which advances are given to the prime (best) customers of the banks. It is also used as a reference rate for loans to borrowers and the rates of various products are pegged to PLR.

This rate cut signals lower interest rates for the larger corporates, small and medium enterprises and retail customers, on some of their lower risk loans.

For example, for every 75 basis points cut by a bank; a retail borrower has to pay Rs 1,250/ month less, for a Rs 20 lakh home loan. The amount may not be significant but this can be viewed as a directional move that the rates have further scope to come down in coming months.

In the coming quarter, banks may see some moderation in their net interest margin as the PLRs will be lower and the cost of deposits may remain relatively high.

This cut will not only reduce the burden for the borrower but also lead to higher quality loan book for banks.

The banks have also hinted at deposit rate cuts, which substantiate the argument that interest rates are set to come down.

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