Crisil report says for every 25 bps cut in deposit rates, banks could see a decline of R5,000 crore in a year. The adoption of the marginal-cost-of-fund method to calculate base rates will lower lending rates by 50 bps, hitting profits as the return of assets is expected to fall by 20 bps in FY17
Indian banks could see a fall of Rs 20,000 crore in profits for 2016-17 once they adopt the Reserve Bank of India’s proposed guideline to use marginal cost of funds to calculate base rates, said rating agency Crisil in a report.
“Our base-case is that profitability of banks will have one-time impact of around Rs 20,000 crore in FY17, which would be equal to 15% of the total estimated profit of the banking system for that year,” said Pawan Agrawal, chief analytical officer at the agency. Crisil added the impact will depend on whether RBI will give any leeway to banks in terms of a longer timeframe.
On Wednesday, in a draft guideline, RBI detailed a new formula for base-rate determination by banks and said lenders will have to use marginal cost of funds instead of average cost of funds for calculating their base rates. The central bank said the move will ensure greater monetary policy transmission. The draft proposes to implement the method by April 2016 and the RBI has asked banks to give feedback on the draft norms by September 15.
Many banks currently use the average cost of funds method to calculate their base rate while some have already migrated to the marginal cost of funds. Baring HDFC Bank whose base rate is at the lowest level of 9.35%, most banks’ base rates are around 10%. State Bank of India and ICICI Bank have base rate at 9.70%.
Crisil report also said that for every 25 bps cut in deposit rates, banks could see a decline of Rs 5,000 crore in a year.
Crisil believes the adoption of the marginal cost of funds method to calculate base rates will bring down banks’ lending rates by 50 bps, thereby, hitting profits as the return of assets is expected to fall by 20 bps in FY17.
“However, given the impact on profitability, banks may shy away from cutting deposit rates, especially in times of low profitability, which will defeat the objective of quick transmission of cuts in the RBI’s policy rates,” the report said.
However, the hit is due to a falling interest rate scenario and in a rising rate regime, banks will be set to benefit as they can pass on increase in their cost of funds immediately on the asset side, Crisil said.