PLR cut, banks pine for credit takeoff

Margins of smaller entities could get squeezed more

MUMBAI: The cuts in prime leading rates (PLR) effected this month, banks are hoping, would spawn a pick-up in demand for loans, even if it means a squeeze in their net interest margins (NIMs).

Declining credit growth, easier liquidity and some pressure from the government has forced banks to reduce their benchmark lending rates this month.

State Bank of India led the way cutting 25 basis points off its PLR last Monday followed by a similar snip by Canara Bank.

Private sector Axis Bank has also cut rates, while state-owned IDBI and Union Bank have, too, hinted about following suit.

Punjab National Bank, chairman and managing director K C Chakrabarty said this should spur credit growth.

“There is enough demand for loans now, and where there is less the cuts will create demand. If there is surplus liquidity, instead of investing it in government securities, banks can lend more,” he said.

Chakrabarty’s bank will consider a rate cut at a meeting later this week. He expects competition to ensure that banks may have to cut rates further if credit does not pick up as expected.

 “Whenever the PLR is cut, the eye is always on the corporate borrowers so obviously there is a feeling that credit growth will pick up,” said an official from Axis Bank.
Credit growth has been a sticky issue for banks this year with the incremental credit growth falling to 14.4% in 2007-08 from 19.3% in 2006-07.

Deposits, though, have risen at a faster pace at 18.4% versus 15.1% last year, mainly as banks continue to offer high interest on deposits.

Analysts warn that cutting lending rates while keeping deposit rates high will mean sureshot pressure on margins.

HSBC analysts Todd Dunivant and Saumya Agarwal said the SBI cut comes at a time when loan growth is already above the sector average, while the cost of funds is yet to decline and could pull down already pressured NIMs.

“While this move could boost volumes in certain segments like home loans, commercial vehicles and SME, it would do little to ease the stress on margin, unless the cost of
deposits come down,” they said in a note on February 14.

SBI’s net interest margin for 9 months ended December 2007 was 2.83% compared with 2.95% a year ago, the pointed out.

IDBI Capital analyst Ravikant Bhatt said a cut on the deposit front should come soon if banks have to avoid trouble.

“Margins may see a compression of 5-10 basis points,” he said.

Gaurang Shah, head of research, K R Choksey Shares & Securities, says demand for credit won’t be a worry because capacity utilisation at most companies are at their highest levels currently.

“Setting up of newer capacities will boost corporate credit growth. But margins would also be affected as companies, which have earlier borrowed at lower rates, would request for lower rates further as a result of rate cut,” he said.

Shah calculates that for every 100 bps cut in PLR, net interest margin at SBI would reduce by 30-40 basis points. “Other banks would be affected more,” he said.

Vaibhav Agarwal, analyst at Angel Broking, predicts that mid-size public sector banks could see a margin compression of as much as 10-20 basis points following a PLR cut.
That’s where the crux of the issue is: The move needs to engender enough additional loan growth to offset the crimp in the margin.

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