Margins May Come Under Pressure

Bankers say that margins of commercial banks will be under pressure in the near future. Deposits grew from about Rs 4,49,000 crore to Rs 4,69,000 crore between March 29, 1996, and August 16, 1996. In the same period, bank credit fell from Rs 2,70,000 crore to Rs 2,68,000 crore. Consequently, the credit deposit ratio fell from 60.23 to 57.19.

The fall in credit and the rise in deposits meant that resources raised could not be deployed effectively in bank credit, the most remunerative asset in the system. Hence banks had to park their funds in investments with low returns. Credit could give returns as high as 20 per cent, while investments give a mere 14 per cent return.

State Bank of India, in order to increase credit offtake, has cut lending rates, and Bank of Baroda is set to follow. This, in turn, will force the banks to cut deposit rates to maintain margins. However, several problems have cropped up. First, a fall in deposit rates is expected to result in a flight of deposits from the banking system to non-banking finance companies. With companies like Reliance Capital offering 20 per cent on their deposits as against the 13 to 14 per cent offered by banks, such a flight is assured.

On the assets side, a cut in PLR is not expected to increase credit offtake by blue-chip companies which are directly accessing the market. The result is that the high-risk companies, which will now get a better rate, will increase credit offtake. This will mean a riskier portfolio for banks. It is the bad people more than the good people who will benefit, says a banker.