The Hindu Business Line : `Banks facing higher cost of deposits'

Mumbai May 25 The scramble to keep pace with credit growth will push up banks' cost of deposits by 50 basis points in 2007-08, says a report by Crisil.

However, it feels that banks may not be able to pass on increasing costs to borrowers as further increases could significantly hamper growth or force borrowers to look at alternative avenues.

Cost of deposits had risen by 60 basis points to 5.1 per cent in 2006-07. The Crisil press release says, "Incidentally, despite the increase in the cost of deposits, the banks' net profitability margin increased to 1.55 per cent in 2006-07 from 1.32 per cent in 2005-06, as banks passed on the increase in costs to their borrowers."

Changes in composition

The rating agency feels costs have risen due to changes in the composition of term deposits.

Crisil's analysis reveals that the proportion of bulk deposits (deposits above Rs 1 crore), which carry higher interest rates and have relatively shorter tenors, has increased over the past five years.

"More than half of the term deposits mobilised in 2007 had tenors of less than one year, as against less than a third in 2000, resulting in frequent deposit renewals and thus exposing banks to interest rate risk," said the release. According to Mr Tarun Bhatia, Head - Financial Sector Ratings, Crisil, "Several banks were able to fund their credit growth during the past couple of years by selling their excess statutory liquidity ratio investments.

SLR limit

However, this may no longer be feasible, given that the average SLR is currently estimated at 28 per cent, just 3 per cent above the threshold limit, thanks to the race among banks to increase business." According to Mr Raman Uberoi, Senior Director, Crisil, the rating agency does not anticipate any significant changes in the majority of bank ratings over the short to medium term.

On capital adequacy ratio, Crisil feels that the overall capital adequacy in the system is likely to improve by around 10 basis points after the implementation of the revised guidelines on capital adequacy in line with Basel-II norms.

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