The Reserve Bank of India’s (RBI) mandate to link floating rate retail and SME loans to external benchmark from next month, may have an impact on banks’ margins and pose challenges to their asset-liability management, analysts said.
Indian lenders, especially private, that have been reluctant to pass on the benefit of low policy rates to borrowers, will witness a contraction in their Net Interest Margins (NIMs) as borrowers migrate to the new rate regime.
“Largely, private banks are to be most impacted as transmission by private lenders was limited,” said Kajal Gandhi, an analyst at ICICI Securities. “On the liabilities side, banks will likely link saving/bulk term deposit with the external benchmark (repo rate) to address pressure on margins thereby matching interest rate risk on the asset side,” Gandhi said.
Also, banks with higher proportion of housing loans may get affected. For instance, the housing loans constitute 17.5 percent and 18.9 percent of total loans for Axis Bank and State Bank of India (SBI), respectively. Kotak Mahindra Bank, IndusInd Bank and HDFC Bank have a higher non-housing retail portfolio, where floating proportion will be lower, according to ICICI Securities.
While the mandate is not applicable to Housing Finance Companies (HFCs), their margins may also come under pressure. “Large HFCs like HDFC, LIC HF and PNB HF compete with banks closely in their retail home loan segment and will need to catch up with their banking peers on any movement in home loan rates,” said M B Mahesh, analyst, Kotak Institutional Equities Research.
It will be challenging for banks to link the liabilities side to external benchmark and only linking asset side would lead to asset-liability mismatches. According to Soumya Kanti Ghosh, group chief economic advisor at SBI, floating term deposits are not accepted by the Indian depositors and have already been unsuccessfully experimented by some peer banks in India.
While the new framework was introduced last year, it was not compulsory for banks to adopt it. The RBI did not want to mandate it for banks since they were dealing with high slippages. But sticky lending rates despite four consecutive reductions in policy rate this year prompted the regulator to make it mandatory.
As many as 13 state-owned lenders launched repo rate-linked products last month after the government nudged them to lower their lending rates as part of measures to boost credit flow to the economy. These include SBI, Bank of Baroda, Bank of India, Punjab National Bank and Union Bank of India.
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