Banks downplay margin worries

Rising lending rates, low-cost deposits to offset higher deposit mobilisation cost.

Rising term-deposit rates might not lead to any significant erosion in banks’ net interest margins for the current financial year, said bankers and analysts.

“Contrary to the dip expected, the net interest margins of banks have risen by six basis points sequentially,” Manish Chowdhary, Aditya Narain and Pooja Kapur, analysts with Citigroup Global Markets, said in their third quarter review of Indian banks’ financial performance.

In the last six months, banks have increased deposit rates several times. Since October, the rates have risen by 150-250 basis points. In comparison, lending rates have risen by 75-125 basis points in the last five months.

State Bank of India, the country’s largest lender, has raised deposit rates four times since August. It is offering as much as 9.25 per cent for 555-day and 1,000-day deposits.

However, when concerns were raised over higher deposit costs reducing banks’ net interest margins — a key ratio to assess their financial performance — bankers disagreed.

“It’s not that we have raised only deposit rates. Lending rates have also gone up. Plus, there is growth in (low-cost) current and savings deposits. So, I don’t expect any significant impact on our net interest margins this year,” said a top official of Union Bank of India.

The government-owned bank closed the first nine months of this financial year with a net interest margin of 3.3 per cent. “We believe our margin will remain at these levels for the entire year,” the official said.

Private lenders also dismissed claims of a likely drop in margins this financial year.

“Quarter-after-quarter, we have maintained our margin through a slew of initiatives. Driven by the growth in our (low-cost) current and savings deposits, we hope to maintain it over 3.7 per cent,” said P R Somasundaram, managing director and chief executive, Lakshmi Vilas Bank.

The bank is paying 10.1 per cent on deposits with a maturity of one to two years, one of the highest. It closed the first nine months of the financial year with a net interest margin of 3.7 per cent. Its margin stood at 2.99 per cent last financial year.

The impact of the rise in deposit rates on banks’ margins occurs with a time lag, analysts say. As a result, margin contraction in the current financial year is likely to be limited, they say.

Most banks, however, expressed doubts over sustaining their margins next financial year if interest rates continued to rise.

“Next year’s performance will depend on many things. If the rise in policy rates continues, banks will have to take a call regarding passing it on to their clients. If the rates go up significantly, it may slow down economic activity. So, there’s a possibility that our margins may be hurt next year,” said a senior official with a Mumbai-based public sector bank.

Since March, the Reserve Bank of India (RBI) has raised key policy rates seven times to tame inflation. While the repo rate has risen by 175 basis points to 6.5 per cent, the reverse repo rate has gone up by 225 basis points to 5.5 per cent.

Most analysts expect the central bank to raise rates further as inflation continues to stay above its comfort zone.