Vaibhav Agrawal, banking analyst, Angel Broking, gives his views on the impact of moving towards marginal cost of funding.
Below is the verbatim transcript of Vaibhav Agrawal's interview with Ekta Batra & Reema Tendulkar on CNBC-TV18.
Ekta: Tell us about the impact about the movement towards marginal cost of funding. How much do you think it is possibly going to impact net interest margins (NIMs)?
A: We have to wait and watch exactly in what form the final guidelines come out shortly. Ultimately the broader point is that in India the rates are market determined. We are not exactly a regulated interest rate economy so somewhere we do not expect that movement to this kind marginal cost may necessarily have a very instant big impact. Anyways it will be applicable from April 1. The near-term indications are maybe there is a short-term quarter or two impact but we would prefer to wait for the final shape of these guidelines and how banks actually implement it prospectively before assuming that there would be a very big impact from this.
Reema: Even if there is one to two quarter short-term impact, what could be the extent of it? Would you expect a NIM impact of say 10 basis points, roughly 15 basis points for the banking industry? Gives us a rough idea?
A: Very clearly if you are looking at the different banks in the sector, PSU banks obviously have more loans linked to base rate. Typically as a thumb rule, every 25 basis points base rate cut can reduce the yields by around 10 basis points while a similar number for private banks tends to be somewhere between 3-5 basis points. So, to that extent for several of the PSU banks depending on how much they actually have to cut the base rate due to this shift, there could be an impact maybe somewhere between 5-10 basis points. However, the key question is will they have to immediately cut base rate very drastically because of this shift? That still remains to be seen.
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