While private banks have begun to take away market share in loans and deposits from their state-owned rivals, the impact of the shift is now telling on their margins. In a bid to ramp up their deposit portfolios to support their lending requirements, private lenders have aggressively raised interest rates on term deposits. As a result, the difference between weighted average deposit rates at public sector banks (PSBs) and private banks widened to 28 basis points (bps) in May 2018 from 5 bps in April 2016, according to data released by the Reserve Bank of India (RBI). Between March 2016 and March 2017, the private sector pack’s share of bank loans rose to 27% from 24%. Their share of deposits rose to 35% from 32% during the same period.
On one hand, PSBs are now going through a phase of restricted lending and, as a result, are not having to hike deposit rates to raise funds. On the other hand, with their aggressive pricing of deposits, private banks now find their margins compressing. In a recent note, brokerage Kotak Institutional Equities (KIE) wrote that private banks have not been able to transmit the higher deposit rates into loans. “We are in a relatively unique situation where lending is quite concentrated with a few banks while deposit accretion continues to happen by all banks,” KIE observed. KIE added: “This is pushing these private banks to increase rates to borrow funds while passing them has not been easier but directionally it is improving.”
Of the six private banks that have reported their results for the June quarter, three have seen a fall in their net interest margins (NIMs) on a sequential basis. Kotak Mahindra Bank (KMB) saw its NIM fall to 4.3% in Q1FY19 from 4.35% in Q4FY18. IndusInd Bank, too, saw a 5 bps quarter-on-quarter (q-o-q) fall in NIM to 3.92%. Karnataka Bank’s margin fell 18 bps sequentially to 3% in the June quarter.
Bankers say the repricing of loans under the marginal cost of funds-based lending rate (MCLR) regime has led to margins dropping. Speaking to analysts after KMB’s results, Uday Kotak, MD and CEO, said there is a time lag for transmission under the MCLR regime, depending on the tenures of floating-rate loans at banks. “That transmission time is something which is like work-in-progress. A very significant part of our book is (linked to) six-month MCLR,” he said, adding, “Therefore, you’ve seen the beginning of interest rate increases in our MCLR start around March. So, as we go forward, we see this beginning to transmit itself into the floating rate on the asset side.” The bank has guided for NIMs to settle around 4.1-4.3%.
Romesh Sobti, MD and CEO, IndusInd Bank, pointed to a time lag between the rise in cost of funds and that in yield on advances. “NIM actually shrank by 5 basis points, but still is above 3.9%, and that’s only a question of the cost of funds or the cost of deposits running ahead of the MCLR increases which happened with a bit of a lag,” he told investors. Analysts say the pressure on NIMs at private banks is unlikely to be relieved anytime soon. “With deposit rates broadly stable, further rise in MCLR rates at a swift pace, is less likely,” KIE wrote. “NIM pressure (is) likely to remain in the medium term.”