OBC, IOB, YES Bank to be most affected by new base rate methodology: Moody's

All these lenders have a greater proportion of term deposits in their funding base

The proposed new regime for calculating base rate, the benchmark rate for pricing loans, is going to affect lenders with a greater proportion of term deposits in their funding base the most, says a Moody’s report.

According to the report, Oriental Bank of Commerce (OBC), Indian Overseas Bank (IOB), YES Bank, Canara Bank, and Union Bank are among the ones that will be most affected.

While OBC has 76 per cent customer term deposit to total deposits, IOB is at 75 per cent whereas YES Bank is at 71 per cent at the end of FY15. “Because the latest interest rates on various deposits will be used to calculate the marginal cost of funds, banks with a greater proportion of term deposits in their funding base would likely be the most affected. Because longer tenor deposits are less sensitive to decreases in policy rates, they tend to increase the cost of funds derived using current calculation methods,” said the report.

According to the draft guidelines issued by the Reserve Bank of India (RBI), banks will have to follow the marginal cost of funds method for base rate computation from April 1, 2016. At present, banks can choose to compute base rate on the basis of average cost of funds or marginal costs. Analysts say this new system of calculation of base rates will reduce banks’ flexibility in determining their lending rates. However, RBI has been pushing banks to shift to marginal cost for computation as it can speed up the process of monetary transmission.

In the past few months, RBI has pointed out several times there is a mismatch between its rate cut and the reduction in base rates by banks. Base rate is the benchmark rate to which all loan rates are linked.

“The willingness of banks to cut base rates — whereby they forego income on existing borrowers in order to attract more new business — is muted,” said RBI’s annual report.

In this calendar year, RBI has reduced repo rate, the rate at which it lends to banks, by 75 basis points, whereas most banks have reduced the base rate by only 25-30 basis points.

Recently, a CRISIL report also noted the profitability of banks would take a one-time impact of around Rs 20,000 crore in FY17 once the new base rate computation is implemented.

The net interest margins are also expected to come under pressure.

"WE expect the RBI's increased micromanagement to negatively pressure banks' interest margins and profitability, particularly in the current benign credit environment," said the Moody's report.