Bankers said the move will delay margin recovery since they cannot cut deposit rates sharply due to stiff competition from alternative investment avenues such as mutual funds.
Though the lending rate cut is lower than the 25-basis point repo rate cut announced by the RBI, it is likely to delay the recovery in bank NIMs, they said.
On Friday, SBI cut its benchmark MCLR rate by five basis points across all tenures. The interest rate on its special Amrit Vrishti 444-day deposit scheme was also cut by 15 basis points to 6.45% while the rate on the two years to less than three years deposit bucket has also been reduced to 6.40% from 6.45%. The new rates are effective from December 15.
One basis point is 0.01 percentage point.
Indian Overseas Bank (IOB), Bank of Baroda and HDFC Bank have also reduced their benchmark MCLR rates by an identical five basis points.Bankers said rate cuts post policy take into account funding costs and are likely to have an impact on NIMs.
“We have reduced our MCLR after our asset liability committee meeting, which is generally held before the 14th of every month,” said Ajay Kumar Srivastava, chief executive of IOB. “Going forward, we expect some pressure on margins because deposit rates have limited scope of going down from these levels. The improvement in margins that we expected in the third quarter may be further delayed.”
NIM, or the difference between the yield earned on loans and that paid for deposits, is considered a key matrix for judging banking profitability.
Interest rates on fresh loans have come off 76 basis points since the RBI started the rate cut cycle in February, while those on outstanding loans have fallen 58 basis points.
With fresh deposit rates already down more than 100 basis points and banks facing stiff competition from alternate investment avenues like mutual funds, any cut in lending rate will dent NIMs.
More importantly, MCLR cut impacts only a part of bank loans because a large chunk of loans, especially to retail and MSME segments, are linked to benchmarks like repo and are automatically repriced lower as soon as rates are reduced by RBI.
“More than 85% of bank loans are priced via an external benchmark or through the MCLR calculation, which means all cuts impact margins directly, especially if deposit rates don’t move much,” said the CEO of a large public sector bank. “With the latest cut, the recovery of bank margins will be delayed,” he added.
Of course, another rate cut by the RBI in its next policy could change the math.
Manish Ostwal, fund manager at Nirmal Bang PMS, said he expects bank margins to improve only in the first quarter of the next fiscal.
“One can clearly say that the margin improvement expected for banks will slow down,” he said. “MCLR rate still corners a large chunk of bank loans, but the only silver lining is that growth in the busy season is coming from relatively high yielding segments like personal and SME loans, which could help cushion some impact.”