The street is bullish on private sector banks for the current fiscal after Tuesday's repo rate cut by RBI. Private sector banks will try hard to grow their business this year, according to marketmen. However, public sector banks will be busy trying to recover bad loans this fiscal, they said.
Though analysts expect loans and deposits to grow according to apex bank's estimates of 17 and 16 per cent respectively, they say net interest margins will shrink. Net interest margin is the net interest earned by a bank expressed as a percentage of total interest-earning avenues such as loans, investments, and lending in the short-term money market.
“Though lending rates might decrease by 25 to 50 basis points, banks will not be able to cut deposit rates commensurately,” said Mr Dinesh Shukla, Banking Analyst, Sharekhan.
“With increasing stress on the economy, increase in the number of restructuring cases and NPAs, net interest margins will reduce for the first two quarters and then stabilise in the second half,” he added.
Net interest margins will be hit on a second count, said experts.
Floating rates to change
“When interest rates go down, loans which are usually on floating rates get re-priced faster than those deposits which are locked-in for a specified time period,” said Mr Kunal Sabnis, Banking Analyst, JHP Securities.
Analysts said that a cut in deposit and lending rates would be done only by those banks which had increased them last time. “During the last rate hike many banks did not pass on the hike to their customers,” said Mr Sabnis.
“And banks which did not raise deposit rates for savings accounts are expected to do so now to garner deposits.”
Quality Concerns
Analysts are also worried about the quality of loans disbursed by PSU banks.
“For instance, PSU banks usually give agricultural loans to individuals whereas private banks pick up the agriculture loan portfolio of a micro-finance institution, minimising the risk of default,” said Mr Sabnis.
PSU banks will find it hard to grow their business this year due to a slowdown in deposit growth in the last one year, said experts.
“The Government has capitalised PSU banks only to keep them afloat, not to grow them. For instance, SBI needed Rs 20,000 crore infusion but received only Rs 7,000 crore,” said a banking analyst.