The net interest income of banks is likely to be affected when the Reserve Bank of India starts reducing the key policy rates, said Ajay Srivastav, managing director and CEO of Indian Overseas Bank.
Interest incomes of banks having higher exposure to retail and micro, small and medium enterprises loans will get adversely impacted once the RBI cuts the policy rate, putting pressure on banks’ marginal cost of funds-based lending rates, he said.
When the RBI had significantly raised the key rates, banks failed to match the rise. Now, when the cycle is expected to reverse, banks find themselves in a sticky situation where they could not reap the benefits of higher rates any longer.
Going forward, reduction in loan products, which are linked to the external benchmark lending rate or the repo rate, may see a decline as a percentage of banks’ overall lending books, Srivastav said. Therefore, to navigate the situation, lenders will need to reduce the rate of interest on deposits.
This may aggravate the problem for banks, especially for those having a low share of retail and current account and savings account (CASA), as it may further discourage customers to put their savings in banks. Banks having less than 80% of retail deposits and CASA of total deposits and with heavy reliance on bulk deposits may bear the brunt of lowering deposit rates. “As far as Indian Overseas Bank is concerned, out of total deposits, the bank has around 93-94% of retail deposits and CASA. So, we are safe,” said Srivastav.
The RBI is likely to implement the draft guidelines on the norms pertaining to the BASEL-III liquidity coverage ratio from the next financial year. Anticipating the impact, IOB bank has already started working on the additional run-off factor as proposed in the guidelines. Salary accounts, CASA and retail term deposits are also in focus. These products are sustainable and the run-off factor is favorable to the bank as the per the RBI guidelines, he said. Also, the new guidelines are unlikely to have a big impact As IOB’s LCR stands at 136%, substantially above the threshold of 100%.
According to the MD, IOB is planning to increase the number of branches and automated teller machines. The loan process for MSME portfolios is likely to be streamlined in a couple of months on the line of retail credit. The bank already has collaborations with six fintechs and talks are on to onboard more such entities, Srivastav said.