High NPAs, cost of funds to weigh on bank margins in Q4

Banks are expected to report higher cost of funds for the fourth quarter of 2011-12, on account of tight liquidity conditions and slowdown in deposit accretion. Rising non-performing assets may also have an impact on net interest margins, say analysts.

During January-March, short-term rates spiked as banks rushed to cover regulatory reserve needs and meet financial year-ending targets. Liquidity deficit was almost thrice the Reserve Bank of India’s comfort level, which is one per cent of net demand and time liabilities. Also, bank deposit growth suffered in the third quarter on account of reduced savings, both domestic and industrial, leading to dependence on bulk deposits.

As on March 23, pace of bank deposit growth in 2011-12 stood at 13 per cent compared with the same period last year, according to data from RBI.

As a result, banks were raising certificates of deposits at three-year high interest rates of 11.5 per cent in the last month of the final quarter. “It is hard to imagine how margins could expand in a soft credit cycle, given rate rigidities and the oncoming inflation from fuel, electricity and freight rates,” said analysts from HSBC Global Research.

With a view to ease the liquidity pressure, RBI cut cash reserve ratio by 50 basis points in January and by 75 basis points in March, amounting to release of Rs 80,000 crore into the system.

Analysts at Religare said that while short-term rates could put pressure on net interest margins, the impact would be offset by a cut in cash reserve ratio. The central bank also continued infusing liquidity via open market operations.

Bank credit growth that remained slack for most part of the year picked up in the last quarter due to stability in interest rates. RBI has kept the policy rate unchanged since October 2011. As on March 23, annual credit growth clocked 17 per cent, higher than 16 per cent as projected by the central bank.

P Sitaram, chief financial officer, IDBI Bank, said significant loan growth in March will give some benefit to interest income. “But the pressure on margins due to provisioning of bad loans, restructuring and market-to-market losses on bonds will continue to weigh on the bottom line in the fourth quarter.”

Asset quality continues to be the key area of concern in the banking industry, especially for those from the public sector. Non-performing assets (NPAs) were believed to have peaked out in the second quarter for public sector banks after completion of migration to system-based recognition of NPAs and higher recoveries. However, the trend continued in the third quarter. Likely slippages from the restructured accounts in the fourth quarter will make sure that asset quality stays under stress.

“Approvals of cases worth Rs 20,000 crore during third quarter and pending approvals of Rs 24,000 crore under the CDR mechanism, along with bank specific exposures, are expected to further fatten the already heavy restructured books over the next few quarters,” said analysts from Angel Broking.

Analysts are of the view that policy rate cuts by RBI will help ease pressure on asset quality, while further reduction in cash reserve ratio will help banks manage liquidity conditions. The central bank is slated to announce the Annual Monetary and Credit Policy for the current financial year on April 17.