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Rising rates, Banks are in a position to pass on costs

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Loan growth for banks grew by 20% at the end of January 2011. Credit growth was broad based as growth from rural regions remained healthy while urban offtake too was robust.

The move towards the base rate regime saw a lot of reluctance from corporate clients who moved away from banking sources (for short term loans). However this was the case during H1FY11 when liquidity was abundant. Banks even gave in by subscribing to corporate debt which pushed up the size of their investment books. Now with liquidity remaining a continuing concern banks have begun passing on costs to corporate clients and are even reluctant to allow corporates the benefits of arbitrage between banking and market rates.

One look at the incremental CD ratio which has inched up from 0.82x in Sep 2010 to 0.99x in Jan 2011 and the situation in the industry is apparent. Since October 2010 bankers have shown serious intent on garnering deposits. With half of Q4FY11 already behind us banks at best are likely to end FY11 with a 14-15% deposit growth. Although deposit rates have moved up by 150-200 bps banks have also begun hiking loan rates by 100-150 bps.

So with this equation how were the NIMs maintained? Apart from the growth in low cost deposits, banks have also been operating at higher CD ratios. Thus contrary to the dip expected in H2FY11, banks are most likely to sustain NIMs during FY11.

However, the story for FY12 could be different as interest rates continue to rise. The focus would then move from sustaining NIMs towards having a broad based growth across sectors.

From the desk of Chaitra Bhat


Written by Fundamental Side

February 18, 2011 at 10:09 am