Press Trust of India
New Delhi, Sept 3: RBI’s new draft guidelines on calculating base rate on marginal cost of funds will significantly impact profitability of banks and could hit them with a one-time Rs 20,000 crore in profit, ratings firm Crisil said Thursday. Equating new base rate to Rs 20,000 crore profit hit for banks, Crisil Ratings in a note said under the new calculus, the base rate could be lower by around 50 basis points (0.5 per cent).
“The Reserve Bank of India’s (RBI) draft guidelines on computation of base rate, if implemented in its current form, will significantly impact profitability of banks,” it said. The RBI guidelines, released earlier this week, require banks to follow the ‘marginal cost of funds’ method for base rate computation from April 1, 2016. “Crisil’s estimates show the change in methodology can lower banking system base rates by approximately 50 basis points (bps) from current levels,” it said. Crucially, it will reduce banking sector profitability because return on assets (RoA) will fall by 20 bps in fiscal 2017, it added.
“Our base-case is that profitability of banks will have one-time impact of around Rs 20,000 crore in fiscal 2017, which would be equal to 15 per cent of the total estimated profit of the banking system for that year. The actual impact will depend on whether the banks will be given a leeway to make this shift over a longer time-frame in the final guidelines,” said Pawan Agrawal, Chief Analytical Officer, Crisil Ratings. Crisil said for every subsequent 25 bps cut in deposit rate, profits will be impacted by Rs 5,000 crore in a year from the rate cut. “Yields of banks that lend mostly on a floating rate basis will be significantly impacted in an environment of falling interest rates,” it added.
Banks with low levels of current and saving accounts, and/or relatively longer tenure term deposits, will also be majorly affected, said the agency. “Nevertheless, in an increasing interest rate scenario, banks will tend to benefit as they will be able to immediately pass on any hike in deposit rate to the base rate.” RBI has proposed the changes to ensure faster monetary transmission. The new calculus for base rate will increase the sensitivity of bank lending rates to changes in the RBI’s policy rate. However, given the impact on profitability, banks may shy away from cutting deposit rates, especially in times of low profitability, which will defeat the objective of quick transmission of cuts in the RBI’s policy rates, Crisil said. Besides, the guidelines will also impact the broader objective of encouraging corporates to increasingly resort to the bond market given that the arbitrage created between rates on bank loans and bonds, due to a lag in monetary transmission by banks, will now disappear. “Banks could look at mitigating interest-rate risks by sourcing more short-term deposits and borrowings.
