Mumbai: Most state-owned banks are bracing to take a hit on their core lending profit in fiscal 2009 following a series of regulatory tightening aimed at curbing inflation.
Bank of India, or BoI, and Union Bank of India have already warned about low net interest margins, or NIM, a measure of the core investments of banks, in the current fiscal year that began 1 April.
These and other public sector banks are, as a result, focusing on non-interest income earned through fee-based activities and treasury operations.
“This NIM level is not sustainable for long. We have to depend on non-interest income seriously from next year,” BoI chairman T.S. Narayanasami said at a recent conference. “You have to be equally bullish on non-interest income.”
To curb inflation, banking regulator Reserve Bank of India raised the cash reserve ratio, or CRR—the money banks have to keep with it—by 25 basis points to 8.25% while announcing its monetary policy in April, within a fortnight of a 50 basis point hike. One basis point is one-hundreth of a percentage point.
The central bank expects to mop up about Rs28,000 crore of liquidity from the system through this tightening.
Meanwhile, the country’s credit growth dropped to a four-year low of 21.6% in 2007-08, compared with 27.6% in 2007, and below the central bank’s projection of 25%.
Following a call by finance minister P. Chidambaram to boost the slowing credit growth, public sector banks pared their prime lending rates in February by 50 basis points.
“There will be some pressure on NIM,” said Bank of Baroda chairman M.D. Mallya. “Credit growth is likely to decline slightly this year. RBI has also cut down its non-food credit forecast to 20% and the new CRR hikes will take away lendable funds. To offset that, banks have to focus on fee-based income.”
Union Bank of India’s chief executive M.V. Nair echoed the view at a recent conference. “Going forward, margins are not going to be very high in the industry. We would be happy to maintain anything between 2.8% and 3%,” he said.
BoI’s fourth-quarter NIM rose to 3.24% from 3.14% a year ago, while Union Bank’s NIM fell to 2.75% from 3.52%. State Bank of India, the country’s largest lender, recorded a marginal drop in its NIM, which stood at 3.07% in 2007-08 compared with 3.09% in the previous year.
Analysts say the cut in prime lending rates, or PLR, rise in CRR and a slowing economy have put banks in a fix.
“When the PLR cuts were done, it was marginally negative as the market expected deposit rate cuts would follow,” said Abhijit Majumder, an analyst with Mumbai-based domestic brokerage Prabhudas Lilladher Pvt. Ltd.
“Then came a slew of negative announcements such as high inflation numbers, unfavourable budget announcements like farm loan waiver, a second round of pension option for bank employees, as well as possible mark-to-market forex derivative losses,” he said.
However, banks could cut deposit rates since loan demand is slowing, said Seshadri Sen, associate director of research at Macquarie Capital Securities India Pvt. Ltd.
Public sector bankers said the cut in PLR is highly unlikely to be reversed. Deposit rates cannot be cut either.
“We cannot bring down our deposit rate across the board; the competition is very harsh,” said a senior public sector banker who did not want to be named. “Unless leaders like State Bank of India cut their deposit rates, we simply cannot afford to do it.”
However, some banks are cutting their deposit rates on selected products to soften the impact of the PLR cut. BoI, Union Bank and Indian Overseas Bank have cut their deposit rates by 25-50 basis points across various maturities.
Some banks have also raised the rate of interest on sub-PLR loans to sectors with higher demand for credit.
Hatim Brochwala, an analyst with domestic brokerage Khandwala Securities Ltd, said the tight interest rate scenario and the increased CRR would affect private banks as well.
“However, I think private banks will be able to maintain their NIM level, if not improve it, in fiscal 2009,” he said.
With the implementation of Basel II banking norms, where higher amounts of capital are needed for risky assets, it is natural that banks would focus on non-interest income, Brochwala added.
“The capital adequacy ratio is higher for the core lending operation as NPA (non-performing assets) levels are higher, too. Whereas, for fee-based income and treasury operations, banks don’t need to put aside that much capital,” Brochwala said.
However, private lenders such as ICICI Bank Ltd, India’s second-biggest lender, would be affected more than, say, HDFC Bank Ltd or Axis Bank Ltd, as the strategies employed by these banks are different.
“Traditionally, ICICI focused more on balance sheet growth than on profit. Whereas, HDFC and Axis generally chased only high-yielding assets. For Axis and HDFC, profitability is more important than a robust growth in advances,” said an analyst with a Mumbai-based brokerage. He did not want to be named as his company did not authorize him to speak with the media.
Analysts, however, say most of the negatives are already priced in. “After the monetary policy, when the air was cleared that interest rates would not come down, bank stocks fell 35-40%. Now, everything is more or less factored in. Lower NIM in fiscal 2009 might not affect bank stocks that much,” said Majumder.