Bankers not hopeful of festive boost to credit uptick

While the Reserve Bank of India expects banks to cut their lending rates during the festive season to push credit growth, lenders said they had no immediate plans to cut the base rate, credit growth remains sluggish and a base rate cut would hurt margins.

The festive season typically starts from August and last till December.

“Traditionally, credit growth is always stronger in the second half of the year and in that sense, this year would be similar.

"But the indicators so far suggest the growth may continue to remain muted,” said Rajiv Anand, group executive, retail banking, Axis Bank.

So far, the base rate cuts of banks are in the range of 25-30 basis points as compared to the 75-basis points repo rate cut by RBI since January.

Senior public sector bank executives said even if the base rate is cut 25 basis points, there is no visibility for getting business volumes that would compensate for the loss of income.

Plus, high credit costs going to weigh on incomes.

P S Rawat, executive director at Canara Bank, said the bank’s asset liability committee would take a call on the base rate in the next few weeks.

In the April-June quarter, according to RBI data, credit in the banking system declined by 2.5 per cent, whereas deposits declined by 1.3 per cent.

In FY15, credit to industry grew at the slowest pace in the past 17 years at only 9.52 per cent.

Banks expect credit growth might pick up only marginally in the coming quarters.

K A Babu, head-retail, Federal Bank, said, “. . . . The festival season is the period we usually see a better credit growth than the first two quarters.

"Therefore, in that sense, it will be better, but as of now, it is difficult to see how if it is going to be a significant improvement.”

According to bankers, further cut in the lending rate will impact interest income, while the benefit of falling cost of funds (deposits) will accrue only over a period.

According to a Bank of India executive, there is pressure on net interest margins because of low growth interest income.

"Plus, there has also been reversal of part of interest income on corporate accounts, which became non-performing assets.

“The bank has to protect NIMs, leaving very little room for any immediate cut in base rate,” he said.

The majority of the advances of the banks (estimated 75-85 per cent) are linked to the base rate, while liabilities are at a fixed rate of interest.

Margins remain under pressure in the current financial year as was the case in 2014-15.

For public sector banks, which have about 70 per cent share in loans, saw NIMs declining from 2.46 per cent in FY14 to 2.37 per cent in FY15.

According to rating agency ICRA, any reduction in repo rate gets transmitted to liabilities (that too only to term deposits, which constitute 69 per cent of deposits) only when these mature, while the assets get re-priced as soon as the base rate is cut.

Bankers believe the credit growth has continued to remain under pressure due to a slowdown in the corporate segment of the business.

Industry players say the activity in the corporate side has remained mainly limited to working capital loans.