High cost of funds to dent bank NIMs by 25-50 bps: S&P

The rising cost of deposits may hit net interest margins (NIMs) of Indian commercial banks by 25-50 basis points in the current financial year, according to a report by Standard and Poor’s (S&P).

The Reserve Bank of India had raised the interest rate on savings deposits from 3.5 per cent to four per cent in the annual policy for 2011-12 and owing to a liquidity crunch in the system, banks had raised term deposits rates to attract funds. Therefore, a migration from savings deposits to high-yielding deposits was seen.

S&P Credit analyst Geeta Chugh said the intense competition among banks limited the ability to pass on the rise in the cost of funds to customers.

The rising cost of funds could put bank margins under pressure, though lower provisioning costs could offset the impact. The net interest margin for major Indian banks stood at 3.08 per cent for 2010-11, compared with 2.65 per cent for 2009-10, according to S&P data. A stable retail deposit base and a prudent regulatory environment support the industry's creditworthiness.

On the quality of bank loans, Chugh said with declining slippages from the restructured loans portfolio, the banking sector’s gross non-performing assets would improve to 2.4 per cent by the year-end from 2.6 per cent in 2011. The asset quality of Indian banks would improve, riding on the country's sound economic growth and reasonable leverage. Banks’ focus on low-to-moderate risk segments and the increased diversification in loan portfolios would also help their asset quality.