Rush to park your money in a fixed deposit if you wish to earn high interest rates. For, it will not be long before most banks start reducing their deposit rates, to protect further dilution in their net interest margins (NIMs).
State Bank of India (SBI) cut its retail term deposit rates by 50-100 basis points (bps) last week. Other banks are expected to follow, to ease cost pressure on their margins. Government-owned banks are expected to take the lead, as most of them have given hefty discounts on their lending rates to propel festive season credit demand. “Banks will have to cut their deposit rates to maintain their NIM. You may see a cut of 25-50 bps in the near-term,” said A K Bansal, executive director at Indian Overseas Bank.
In 2011-12, most state-run banks reported a decline in their margin, as the increase in cost of deposits outpaced the rise in yield on advances. Analysts expect bank NIM to decline further in the current financial year. “In our view, the pressure on margins would continue in 2012-13, as yields on loans are likely to be under pressure, given the reduction in lending rates and waning price power due to lower loan growth. In our base case, we have assumed a margin decline of 15-20 bps,” Alpesh Mehta, analyst with brokerage Motilal Oswal Securities, wrote in a note to clients.
Most private banks have so far refrained from offering hefty festive season discounts on their retail lending rates, especially on home loans. While these lenders are also evaluating options to pare deposit rates, they’d prefer to wait for their state-run rivals before slashing their rates.(WHERE THEY STAND)
“We will evaluate and take a decision based on our asset-liability position. If all new high quality credit is coming at lower rates, there may be some compression in banks’ margins,” said Shyam Srinivasan, managing director and chief executive of Federal Bank. “It is only a matter of time before all banks reduce their rates, since SBI has already done it. But the timing will vary from bank to bank,” said the chief financial officer of a mid-sized private bank in Mumbai.
Some suggested the deposit rate cut might happen in a few tranches, as lenders would assess credit demand in the second half of this financial year before cutting deposit rates aggressively.
“While banks will have to maintain their NIM, they also have to ensure that funds are available to support credit growth. As of now, banks can afford to reduce deposit rates. But if credit growth picks up in the second half, deposit rate cuts beyond a certain limit may not be possible,” said P Sitaram, chief financial officer at IDBI Bank.
