The Hindu Business Line : Banks repricing term loans as margin shrink

Cause for revision
NIM of most banks in Q1 drops to about 2.25%
Expenses in raising resources up considerably.
Costs of subordinated bonds seen rising by another 50 basis points.

C. Shivkumar

Bangalore, July 30 Faced with mounting margin pressures, banks have now begun repricing some of the term loans on their books. Top bankers said the repricing would include some of the term advances made in 2005 and 2006, when interest rates were low. Some of the corporates then had raised term funds at rates as low as 7 per cent during the period. All these advances would now be repriced.

The move comes as net interest margins (NIM) of most banks dipped to about 2.25 per cent in the first quarter of the current year. Traditionally, domestic public sector banks have enjoyed NIMs of anywhere between 2.75 and 3 per cent.

Bankers said that some of the advances were on a floating rate basis but some market-savvy corporates had drawn the advances on a fixed-rate basis. Most covenants provided for repricing of advances, though few banks had taken advantage of the provision till now.

Banks had desisted from repricing, anticipating a moderation in interest rates. Besides, apprehensions of exits by some triple-rated corporates in favour of external commercial borrowings, prevented interest resets.

Bankers said those fears no longer existed, especially since cross-border funds were even tougher. Currently, even for the best domestic corporates, pricing spreads were unlikely to be lower than 400 basis points over the London Inter-bank Offered rate.

Cost of funds

Besides, cost of raising resources has also increased considerably for banks. The weighted average cost of working funds for banks was already close to 8 per cent. This was after the series of deposit rate hikes.

Public sector banks are currently offering rates as high as 10.5 per cent for two year deposits. Besides, bankers said that the cost of capital funds, in the form of subordinated bonds, was close to the 11 per cent for “Triple A” rated banks.

After the hikes in the Cash Reserve Ratio to 9 per cent, the costs of subordinated bonds are expected to rise by another 50 basis points. As a result, there were few alternatives to repricing some of the advances, bankers said. The repricing would, however, increase the interest costs on some of fresh advances to over 12 per cent. These costs would still be at a discount to the current benchmark prime lending rates of 13.25 per cent. In addition, bankers said repricing would also hit some of the corporate drawdowns on their credit lines.

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