Banks’ net interest margin (NIM), a key indicator of their profitability, is likely to have moderated in the quarter ending March, as lenders struggled to reduce deposit rates amid stiff competition in Q4 and were forced to cut interest rate on loans linked to external benchmark after the 25-basis points (bps) rate cut by the Reserve Bank of India (RBI) in February, experts say.
“I think currently the whole industry is facing a real issue in terms of protecting them (NIM). On one hand your lending book which is linked to external benchmark has started repricing because of the reduction in repo. On the other side, because of the tightness in the liquidity for past few quarters, banks have not been able to reduce the rate of interest on the deposit,” said Prashant Kumar, MD and CEO at Yes Bank.
Cost of deposit of lenders have been rising over the last 6-9 months period. According to CRISIL Ratings, there could be a moderation in margins as loan assets are likely to re-price downwards faster than deposits in a declining interest rate environment.
“This is because over 40 per cent of loans are linked to external benchmarks leading to quick repricing of these loans, while any deposit rate cuts would be applicable only to the incremental deposits raised and renewals. Further, the extent and timing of transmission of policy rate cuts on to interest rates on fresh deposits also remains to be seen amidst stiff competition for deposits,” the rating agency said.
As per IIFL Capital, with average banking sector liquidity being in a deficit of ₹1.8 lakh crore in Q4 versus a surplus of ₹0.7 lakh crore, and subdued deposit growth, there has been no transmission of the recent repo rate cut to the term deposit rates. However, a few private lenders have cut savings account interest rate in Q4, which should aid their cost of funds.
“With the partial impact of rate-cut on EBLR-linked loans (reset period varies for individual banks), we expect core NIMs to contract 4-20 basis points q-o-q for most banks. However, reported NIM could be higher for select banks (ICICI) due to lower number of days in 4Q. IndusInd Bank and RBL are likely to see higher NIM contraction of 7-20 bps q-o-q due to interest reversals from elevated slippages,” IIFL Capital said.