0.75% cut by banks may result in loss of Rs 2,200 cr: ICRA

Rating agency ICRA today said that 0.75 per cent decline in interest rate by banks could lead to annual interest income loss of up to Rs 2,200 crore.
"Assuming a 75 basis points decline in interest rate, annual interest income loss to banks (on lending operations) could be in the range of Rs 150-220 billion," it said in a study.
The draft guidelines issued by RBI earlier this month seems to follow upon the central bank's concern that despite a 0.75 per cent cut in the policy rate in the current fiscal, banks (on an average) lowered their base rates by just 0.25-0.30 per cent.

However, lagged monetary policy transmission is attributed primarily to lag in re-pricing of banks' term deposits on account of the difference in the pricing cycle of deposits and advances, it said.
The RBI issued draft guidelines on computation of base rate based on marginal cost of funds methodology. The RBI proposes to implement the guidelines with effect from April 1, 2016, and banks have to present the roadmap to meet the guidelines within two months from the date of final circular.
"While the draft norms hold the potential to improve the efficiency of monetary policy transmission, banks would have to bear the cost in the form of lower net interest margins (NIMs) till the time their deposits get re-priced to lower levels (on a par with the marginal cost of funds) in a declining interest rate scenario," it said.

In a declining interest rate scenario, it said, over a one year horizon, banks would be able to get 20-22 per cent of the funds at a cheaper rate, while on the asset side 50-55 per cent of their assets would start earning less as soon as the banks adjust their deposit rates down.

It further said that a decline in banks' base rates could improve their competitive positioning, as in the current scenario banks are losing highly rated corporates to capital market sources (bonds and commercial paper).
As on June 30, banks' credit portfolio grew by a mere 8.5 per cent on annual basis while credit through bonds and commercial papers reported growth rates of 21 per cent and 59 per cent, respectively.

A decline in base rates may improve the pace of credit growth for banks, it added.