Improvement in yield on advances to outpace the growth in cost of deposits in the banking industry. Most banks could register an increase of around 50-75bps in their net interest margins (NIMs) during the nine months ending December 31, 2010

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Banks net interest margins may rise: CARE
fe Bureau Posted online: Tue Jan 04 2011, 11:30 hrs
Mumbai : Leading rating agency CARE expected the improvement in yield on advances to outpace the growth in
cost of deposits in the banking industry.
Most banks could register an increase of around 50-75bps in their net interest margins (NIMs) during the nine
months ending December 31, 2010. The banks witnessed a non-food credit growth of 10.7% YTD while deposits
grew by just 7.8% YTD. Around 75% of the portfolio of most banks is linked to their BPLRs which have risen more
than the banks’ base rates, said CARE.
“We expect the increase in BPLRs to be higher than the increase in base rates,'' said CARE in its report, After The
Base: Reality Check , released on Monday.
Beginning July 1, 2010, all new loans are to be priced only with reference to the base rate. The base rate was
introduced to increase transparency, make application across borrowers non-discriminatory and facilitating
transmission of policy rates.
While the issue of transparency has largely been addressed, with some banks even providing a product-wise
breakup of interest charged on different kinds of retail loans on their websites, the non-discriminatory application
across borrowers is difficult to gauge.
Also, though banks have been quick to pass on rate hike to borrowers, there is usually a lag in passing on lower
borrowing costs.
Therefore, a true test for the effectiveness of the base rate mechanism would lie in the extent of monetary policy
transmissions during softening rate scenario, suggested Care. The actual benefits of the base rate to the small and
MSME borrowers will be clearly visible in a declining interest rate scenario.
Judging the extent of transmission of policy rates is perhaps possible. The repo rate rose by 100 bps to 6.25% while
the reverse repo rate rose by 150 bps to 5.25%. Base rates across banks have moved by around 50-100 bps, with
the exception of SBI, whose Base Rate moved by just 10 bps during the period. However, SBI has increased its
base rate to 8% w.e.f. from January 3, 2011.
So, it appears that the introduction of base rate has largely achieved the aim of transmission of policy rates so far.
Interestingly, during this period even the BPLRs moved in a similar fashion across banks registering a rise of
75-150bps; unlike previous periods.
For instance, between the September 2008 to December 2009, although repo rates declined by 425 bps; the BPLR
of public sector banks changed by 200 bps while for their private counterparts BPLR changed only by around 100
bps. The average monthly CP issuances doubled from Rs 16,400 crore during FY10 to almost Rs 32,973 crore per
month, following the implementation of base rate. At Rs 64,245 crore, October 2010 witnessed the maximum
amount of CP issuances in 3 years. This increase was possibly in anticipation of further rate hikes by RBI. CP
issuances however slowed to a trickle in November 2010 at Rs 8,136 crore as systemic liquidity tightened and the
CP rates moved up, closing the gap with the base rates.
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