The year 2010-11 was a difficult one for banks because interest rates rose sharply while liquidity wasn?t always adequate. With wholesale inflation ruling at above 8% for the better part of the year, RBI was forced to raise policy rates several times between March 2010 and March 2011, as a result of which the key repo rate was raised by a steep 250 basis points. Banks were forced to fall in line?for instance, while the State Bank of India?s base rate at the start of the year was 7.5%, towards the end it had moved up to 8.5% and, of course, thereafter has risen further by a sharp 75 basis points to 9.25%.
With the central bank aiming to keep liquidity in check, deposit rates moved up across tenures by anywhere between 25 and 150 basis points. Indeed, the cost of money at the shorter end rose so much that there were times when the yield curve was flat or even inverted; currently banks are borrowing one year money through Certificates of Deposits (CDs) at 100 basis points over the yield on the benchmark bond, which is hovering around the 8.2 % mark.
Banks were not always able to pass on the higher cost of funds soon enough and although net interest margins (nims) may have expanded for the year as a whole, there were sequential dips in the nims from quarter to quarter. For instance, Punjab National Bank?s net interest income declined by 5% sequentially because it relied more on bulk deposits to fund growth and that shaved off 22 basis points from its nims, which stood lower at 3.9%.
