Lower margins not possible for now: Bhatt

A day after the Reserve Bank of India (RBI) said Indian banks should lower lower net interest margins by increasing efficiency, the country’s largest lender, State Bank of India (SBI), said this was nearly imposible at this point in time.

SBI Chairman O P Bhatt today said given the high transaction costs in the economy, the margins were unlikely to come down in the near future.

“I don’t think it is achievable in the immediate future. If you look at advanced economies where net interest margins are less, their base interest rates are also less. In our economy, average interest rates are in double digits. So, if you take that as a percentage, I don’t think our net interest margins are very high,” Bhatt said on the sidelines of the annual banking seminar, Bancon.

RBI Governor D Subbarao yesterday said during his inaugural speech at the event that banks should cut operating costs, offer higher rates to depositors and bring down interest rates for borrowers.

The net interest margins of Indian banks range from less than two per cent to more than six per cent.

Bhatt said the other reason why it is was difficult for Indian banks to reduce margins, unlike the lenders in the world’s advanced economies, was lower fee income.

“The other point is, in economies where margins are less, there is much higher percentage of fee income. We don’t have that,” Bhatt said.

He also hinted that smaller margins might not be desirable at this point in time. “I do not think that our banking industry will be healthy with a lesser net interest margin. At the moment, a minimum three per cent margin is required for public sector banks to be able to make provisioning requirements and for transaction costs,” he said.

Former finance minister P Chidambaram used to nudge banks to settle for lower margins. Chidambaram used to often cite the global trend of two per cent NIMs and ask Indian lenders to instead focus on increasing fee-based income.