Banks to pass on rate hikes; see pressure on assets

Last Updated: Sun, Jul 31, 2011 07:36 hrs

Lenders will look to pass on Tuesday's interest rate increase to customers sooner than later to maintain profitability, even though at the cost of lending growth, which is seen slowing down.

The Reserve Bank of India, one of the most aggressive central banks globally, on Tuesday raised repo rate by a surprise 50 basis points to fight inflation. It also cut credit growth forecast for banks to 18 percent from 19 percent projected earlier.

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Bankers have told the RBI that response to the monetary policy will be more rapid this time, the Reserve Bank of India's governor Duvvuri Subbarao said at the post policy press conference on Tuesday.

Private sector YES Bank was the first to announce a rate raise earlier in the day while state-run IDBI Bank said its asset liability committee will meet later in the day to take a call on interest rates.

"Any increase in input cost will have to be passed on," said Pratip Chaudhuri, chairman of India's No. 1 lender State Bank of India. "There is some impact on interest rate sensitive sectors such as real estate, vehicle loans, infrastructure."

Several lenders including HDFC Bank, Kotak Mahindra, ING Vysya Bank and YES Bank, have warned about slowing loan growth compared with a year earlier, although they expected margins to stabilise by end of the year.

Higher rate of interest could also "increase pressure" on asset quality, going forward, said M.D. Mallya, chairman and managing director of state-run Bank of Baroda.

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State-run banks in India account for about 70 percent of total loans.

Shares of some major Indian banks fell as much as 4 percent after RBI's surprise policy action on renewed concerns about credit growth and maintaining net interest margins.

The BSE Bank index fell as much as 2.8 percent during the day before closing down 2.46 percent. The 30-share BSE index closed 1.87 percent lower.

Most Indian lenders, which posted earnings for the June quarter this month, have shown a decline in net interest margins - a key gauge of profitability for banks - either on sequential or on year-on-year basis.

Although lenders do not expect a "substantial" impact on margins going forward, there could be a compression of 5-10 basis points, Aditya Puri, managing director of HDFC Bank, told reporters.

"Banks may not fear to pass on the interest rate and they might not go for aggressive deposit mobilisation. So margins may not compress significantly from these levels," said a senior analyst at a local brokerage who did not wish to be named.

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