The Bank of America Merrill Lynch (BofA-ML) in a report has said that Reserve Bank of India(RBI) new draft guidelines asking banks to calculate their base lending rates on the basis of the marginal cost of funds instead of the current practice of average cost may push banks to lower rates more than earlier.
“We think that, in a falling rate environment, the new ‘base-rate’ formula may push banks to lower rates more than earlier, especially banks that have high base rates and were using average cost of funds,” the BofA-ML report said.
The report added that banks with a low share of CASA and a higher share of base rate-linked loans may be impacted more.”HDFC Bank that has just 20-25 per cent base rate- linked loans and +40 per cent CASA is likely to see minimal margin pressure. ICICI Bank, too, could see less margin compression, owing to its much faster growth of domestic loans vs overseas (on which margins are half).
Government banks, in contrast, could see a much greater impact on margins. Hence, we may see more limited rate cuts by them, as their funding costs are also likely to be higher (owing to unallocable costs). SBI may be relatively better positioned owing to its high CASA,” the report said.
The global finanical institution said that given the low loan growth and incremental loan-deposit ratio of less than 35 per cent, banks will cut both deposit and lending rates. RBI’s draft guidelines on base rates will also give a filip to retail loans as they are most sensitive to rates.
“Private banks, with a around 34 per cent share of the retail loan market, are likely to be the key beneficiaries of rate cuts, especially the larger ones that have the lower base rates and a more dominant share of the retail market. Government banks may be more challenged, given their inability to match the sharply lower base rates that may prevail and their lower share of retail loans. SBI is likely to be the only real contender. It may continue to accelerate market share shifts that are already underway in favor of private banks,” the report said.
The shares of the public sector banks closed in red after RBI’s new base rate guidelines as their earnings are more sensitive to the new norms. State Bank of India declined 3.55 per cent, Punjab National Bank lost 3.82 per cent and Bank of India slid 2.71 per cent on Wednesday.