State-run banks, which have lowered the benchmark prime lending rates in the last one month, are likely to witness pressure on their profitability as their net interest margins are expected to get squeezed. According to analysts, banks are cutting lending rates but not deposit rates. This will put pressure on their margins in the short run.
However, KC Chakrabarty, chairman and managing director, Punjab National Bank (PNB) said, ?We are able to manage our spreads without any problem after going for reduction in lending rates recently. While reducing our deposit rates during June last year, we hadn?t touched rates on our advances. As a result, our cost of deposit had come down considerably. Hence, now when we have gone for a rate-cut to the tune of 50 basis points in recent past, it will not affect our spreads due to the lag? effect.??
Defending his decision not cut rate , Romesh Sobti, managing director & CEO, IndusInd Bank said,? The deposit have witnessed an upward trend in the quarter-end which has further resulted in the going up of the cost of deposits too during past one month. For example the rate of certificate of deposits have gone up to 10%. So, the rate-cut is not possible until our cost of funds comes down.?
According to a report prepared by CLSA India, cost of term deposits are 500-600 bps higher than current and savings accounts and rising proportion of term deposits will increase margin pressure for state-run banks. ?There is some more pain still left. The positive side is downside risk is limited,? said a banking analyst from a domestic brokerage house.
Banks may have to further cut their home loan rates as finance minister P. Chidambaram said last week that there is scope for banks to lower rates on home loans up to Rs 20 lakh.
?If the pricing power of banks is regulated, then it creates a negative sentiment for investors,? said a banker with the public sector. Bank stocks were hammered this week with most of the counters registering a fall of around 20% compared with last week?s closing price.
Analysts further point out that clarity is yet to emerge on the Rs 60,000 crore farm loan waiver announced in the budget. ?We continue to prefer private banks and maintain our negative stance on government banks given that their fourth-quarter earnings growth is likely to disappoint due to increasing margin pressures, the absence of treasury gains and higher loan-loss provisioning,? CLSA said.
