The year 2011 is likely to be a tough one for banks in terms of profit margins. Banks, which saw their net interest margins (NIMs) improve in 2010, may see margins (the difference between cost of deposits and yield on loans) come under pressure due to tight liquidity and increasing cost of funds.
“There may be some pressure on margins in the coming months but banks will be able to sustain the current levels,” said NS Srinath, executive director, Bank of Baroda.
Experts feel that margins of banks have peaked in 2010 and protecting the current level will be a challenge. At present, Indian banks have margins in the range of 2.3% to 4.4%.
Banks also saw cost of funds increase in the second half of 2010 due to shortage of liquidity as a result of a tight monetary policy announced by the Reserve Bank of India (RBI). The RBI hiked the short-term lending (repo) and borrowing (reverse repo) rates six times in 2010 in order to tame the inflation.
Banks also faced shortage of liquidity in the October-December quarter due to the mega public issue of Coal India, which sucked liquidity of over R15,000 crore from the system and also because of advance tax payment by Indian companies in December. In order to attract low-cost funds, banks started increasing term deposit rates that increased the cost of funding.
“Although margins are expected to have a downward bias, the recent hike in retail term deposit rates is likely to impact the total deposits meaningfully from the first quarter of 2011-12 onwards,” said the report on banking sector by brokerage house Prabhudas Lilladher.