State-Run Banks To Feel Pressure If RBI Guidelines On Loan Pricing Accepted, Say Analysts

In line with Reserve Bank of India's aim to bring in better transmission of changes in policy rates to borrowers, its working group has issued a report on pricing of credit. If accepted, it could weigh on margins of banks and non-banking financial companies, say analysts.

Some of the key recommendations include allowing existing borrowers to migrate to marginal cost of funds-based lending rate-linked loans without any conversion fee on mutually agreed terms, discretion to banks to charge spread over the external benchmark, and quarterly reset of interest rates on all floating rate loans versus once a year reset frequency in practice at present.

While these recommendations will entail banks to focus more on their asset-liability management (ALM) and bring in better transmission of rates, “without tweaking the liability structure of a fixed rate term deposit, the proposed mechanism could enhance volatility and in current interest rates cycle exert pressure on net interest margins of banks,” said Kunal Shah, analyst at Edelweiss Securities, in his note.

The recommendations will have a larger bearing on margins of banks having higher floating rate loans, which include most public sector banks and private banks which have a loan book tilted towards corporate and home-loans.

This could be incremental negative for state-owned banks which are already grappling with issues like lower credit-to-deposit ratio, higher slippages and lower capital, and this move could dent margins further.

Banks with a diversified and fixed rate book, which inlcudes Indusind Bank Ltd. and Kotak Mahindra Bank Ltd. are better placed under this scenario, he added.

NBFCs with higher share of bank borrowings stand to benefit. Darpin points out that vehicle financing NBFCs seem better placed as compared to housing finance companies given the fixed rate books of vehicle financiers.

Final guidelines are waitied.

The Nifty PSU Bank Index turned negative after opening in the green and is the only sectoral index on the National Stock Exchange that is trading with losses. The Nifty PSU Bank Index was trading 0.66 percent lower at 3,020 at 10.30 a.m.