The Hindu Business Line : Banks’ net margins may come under pressure

Bangalore, Sept. 24 In view of the slowdown in credit off take, the second quarter profits for banks this financial have come under pressure. Top bankers said that the net interest margins were likely to be only about 2.5 per cent. During the corresponding quarter of last year, NIMs were in excess of 3.2 per cent for the industry.

NIMs had already fallen to 2.6 per cent during the first quarter. NIM is the difference between the interest earnings and expenditure. The bleak expectation stemmed from the low credit growth so far this year.

Credit off take since the beginning of this financial year was just Rs 31,159crore. For the corresponding period of the last financial, the figure was Rs 89,137 crore.

Mr Harpreet Singh, Business Director, Centurion Bank of Punjab, said “ NIMs are likely to drop this quarter with this low credit off take.” This drop was expected to not only impact the interest earnings from credit, but also from investments."

High cost of funds

Banks said that during the same period, the cost of working funds has increased to an estimated 6.5 per cent or about 100 basis points more than last year. The high cost was largely on account of high rates offered on some deposit products, especially for tenures between 12 and 18 months. Public sector banks had offered rates between 9.5 and 10 per cent for such funds. Not to be outdone by the competition, private banks had offered at least 25 basis points more.

Yet, the average yield on advances had increased slightly to about 10 per cent, from about 9.75 per cent last year. Moreover, there are no cash flows on the 7 per cent Cash Reserve Ratio. With credit off take slowing down, bankers had deployed the funds only in investments, mostly in short-term Treasury bills and at the reverse repurchase window.

Investments since the beginning of the financial year till August end was Rs 1.15 lakh crore as against Rs 49,000 crore during the corresponding period of last year. The average yield on 91 day since April this year was around 7.10 per cent. The reverse repo window earned only 6 per cent. In fact, most banks have preferred the T-Bill route even for meeting statutory reserve ratio requirements.

Basel II compulsions

The preference for T-Bills was also due to compulsions of complying with the Basel-II this year and next year. This was also to contain any losses due to depreciation, in the event of the India accepting the full guidelines, for investment valuation. Under Basel II guidelines, investments are expected to be fully marked to market.

Yet the fall in NIMs is unlikely to impact profitability of the banks.

This was on account of the high per employee business. Business turnover in Canara Bank, for instance, was about Rs 6 crore.

Besides, some banks have also taken a hit by transferring securities to the HTM category.

Banks had taken advantage of the RBI guidelines permitting 25 per cent of demand and time liabilities to be part of permanent category of investment.

Losses due to amortisation (the realisable value at the time of maturity and the prevailing market value) would be netted from the other income to protect NIMs, the banker said. Otherwise, the deterioration in the NIMs would be steep, they added.

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