The cut by banks in their marginal cost of funds based lending rate (MCLR) may not dilute their net interest margin (NIM) over the next one or two quarters, investment banking firm Jefferies said on Wednesday. However, the reduction in MCLR by banks would have negative implications for non-banking finance companies (NBFC), Jefferies added.
In its report, Jefferies said the MCLR cut is not NIM dilutive for banks in the short term of one-two quarters or the impact would be relatively small.
According to Jefferies, under the MCLR regime the banks have the ability to decide on the ‘interest reset dates’ as a result and increase or decrease in the rate does not immediately translate to a higher or lower interest rate.
“We think, the reset dates are fairly elongated for retail loans (transmission is slow), versus corporate/working capital loans where transmission could be faster,” Jefferies added.
On the other hand, implication on corporate profitability and improvement in interest coverage ratio (ICR) could be material for certain corporates given the extent of MCLR cut; and hence the non-performing loans (NPL) outlook could turn slightly better for the banks.
But the cut in MCLR might impact NBFCs dependent on bond market financing as there could be squeeze in their spreads.
A 60-90 basis points reduction in one-year bank funding rate could shift the marginal volume from a non-bank to a bank, Jefferies said.
The large accretion to the current account and savings account (CASA) deposits by way of demonetisation and only restricted withdrawal of money, has sharply lowered the overall cost of funds of the banks. As a result, banks have cut their MCLR.
Jefferies in another report predicted the year 2017 would be a year of numerous uncertainties and opportunities.
“Demonetisation and GST (Goods and Services Tax) are events of an unprecedented nature. The immediate impact of demonetisation has been a spike in the CASA deposits of banks followed by large cuts in their lending rates,” Jefferies said.
According to Jefferies, in the medium term, the key to the performance of the banking sector is demand recovery and an uptick in capacity utilisation in the core-sector.