An adverse macroeconomic situation across major world economies is leading to a significant impact on the net interest margins (NIMs) of Indian banks. Institutions with sizable international businesses have all faced some form of pressure on their NIMs due to reasons like loss of yield on funds, exchange rate volatility and excess liquidity.
?Banks with a higher dependence on trade finance may have noticed some dip in their margins, since the business did not see much credit demand,? said Bank of Baroda (BoB) executive director SK Jain.
BoB has an international loan book of over Rs 98,000 crore, of which 55% is towards trade finance, 30-35% is for syndicated loans and the rest is towards local financing, said Jain. About 75% of the bank?s international business comes from the United States, the UK and Dubai, he added.
While overseas business is usually a low-margin business for banks due to lower lending rates, NIMs usually stay in the 1.5-1.7% range, bankers noted. ?Unlike our domestic business, we don?t have a large current account savings account (Casa) base in our international business. The cost of funds is thus higher there,? noted State Bank of India (SBI) MD Hemant Contractor.
SBI?s international business contributed to about 16-17% of the bank?s total profits and accounts for about 14% of the bank?s total assets. India?s largest lender too has noted a sequential fall in its international business which came off by 19 bps from the preceding quarter to 1.58% at the end of the July-September quarter. ?The sequential contraction in international NIMs that you saw was largely due to the exchange rate volatility that we noted in that period,? Contractor said.
SBI is looking at maintaining a growth rate of 17-18% in its international business and will be opening a couple of branches in South Africa soon. The bank will also open a subsidiary in Botswana by May and a full-service branch in Tianjin, China.
Public sector banks like Bank of India (BoI) seem to be the worst hit. BoI?s international business for example has grown by nearly 30% from a year ago to Rs 1,72,317 crore in the October-December quarter. However the bank?s NIM during the quarter came down to 1.13%, contracting 10 basis points. The fall in international NIMs was because of a sequential fall of 35 bps in the bank?s foreign yield on funds, which more than offset the discount offered by a 23 bps fall in foreign costs of funds. The sharp fall in foreign yield on funds was due higher short-term lending by the bank, taking advantage of excess liquidity, the bank?s management had noted, while presenting the quarterly results.
BoI?s global margins have fallen by nearly 40 basis points over the last four quarters. Domestic margins too fell by about 4 bps to 2.8%, sequentially.