Union Bank of India’s NIM declines 11 bps in Q2 on RBI penal interest norms

Union Bank of India

Union Bank of India’s net interest margin (NIM) declined 11 basis points (bps) in the second quarter after the implementation of Reserve Bank (RBI) of India’s new guidelines on the penal interest.

“As per RBI guidelines, ‘penal interest’ is to be treated as ‘penal charges’. This will now form part of non-interest income, instead of interest income. Impact of the same is reduction of 11 bps (Q2FY25) and 6 bps (H1FY25) respectively on net interest margins (NIM),” the bank said in a release. The guidelines were implemented from July 1.

Banks must treat penalties for non-compliance as “penal charges” and not levy them in the form of “penal interest” that is added to the rate of interest charged on the advances. Banks cannot treat such penalties as revenues, the guidelines say.

NIM is the difference between the interest income earned from credit products such as loans and the interest paid by a bank or financial institutions. It shows how likely a bank or investment firm is to thrive over the long haul.

“The intent of levying penal interest/charges is essentially to inculcate a sense of credit discipline and such charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest,” the RBI said in a circular.

In the September quarter, Union Bank’s NIM declined by 28 bps year-on-year and 15 bps on a quarterly basis.

Net interest margins stood at 2.9 percent against 3.05 percent in the June quarter, and 3.18 percent in the year-ago quarter, the bank said on October 21.

NII was down 0.87 percent on-year and 3.88 percent on-quarter.

“… earlier what we are booking as penal interest, now it is booked as penal charges, there was 11 bps effect was there. Along with this, deposit rates are little higher, whereas we are not able to get high yield advances. In advances, rates are very competitive,” bank’s executive director Ramasubramanian S said.

In the September quarter, the bank’s net profit increased by 34.43 percent on-year to Rs 4,720 crore.

Speaking to media, managing director and CEO A Manimekhalai said the bank would not compromise on its bottomline while focusing on its top-line growth. The bank would preserve profitability. “We had to let go of a few corporate loans,” Ramasubramanian said without mentioning the names.