Large and mid-sized banks have seen a fall in their net interest margin (NIM) – a key indicator of lenders’ profitability — in Q2 on account of lower yield on advances, higher cost of deposit and as the Reserve Bank of India’s circular on levy of penal charges takes full effect.

Public sector major Bank of Baroda (BoB) saw its domestic cost of deposit rising by 3 basis points (bps) quarter-on-quarter (q-o-q) to 5.16 per cent in Q2, while its domestic yield on advances dropped by 6 bps to 8.93 per cent.

“NIM has been within our guidance of 3.15 per cent (+/- 5 bps), and as of September, NIM is at 3.10 per cent. It is more than that of Q2FY24 with three basis points. However, there is a dip as far as Q1FY25 is concerned. This is mainly because of the fact that with the change in the guideline regarding penal interest to be converted to the penal charges, the interest component has gone down. That has resulted in reduction from 3.18 per cent to 3.10 per cent,” said Manoj Chayani, CFO at BoB.

BoB’s MD & CEO Debadatta Chand said the penal charges circular hit the bank’s NIM by 5 bps or had around ₹179-180 crore impact. The lender now accounts for these charges under ‘other income’ segment of balance sheet rather than ‘interest income’. CSB Bank MD & CEO Pralay Mondal, too, said the penal charges circular has had an impact of 20-25 bps on the bank’s NIM.

New RBI norms

Under the RBI’s new rules, any penalty charged for non-compliance of the material terms of the loan contract should be treated as ‘penal charges’. It cannot be levied in the form of ‘penal interest’ that is added to the rate of interest charged on the advances.

Further, there should be no capitalisation of penal charges, that is no further interest computed on such charges. The norms were introduced to ensure that penal interest/ charges is not used as a revenue enhancement tool by lenders. The switchover to new penal charges regime had to be ensured on or after April 1, 2024, but not later than June 30, 2024.

NIM to remain under pressure

Ramasubramanian S, Executive Director at Union Bank of India, said the bank saw an 11-bps impact on margin in Q2 due to the RBI’s new circular. He said deposit rates continue to be higher, while the yield on loans — especially corporate ones — isn’t rising.

Union Bank’s cost of deposit rose 19 bps q-o-q to 5.56 per cent in Q2, while yield on advances fell 2 bps sequentially to 8.70 per cent. Overall, the bank’s NIM declined by 15 basis points bps q-o-q to 2.90 per cent in Q2.

Says Canara Bank MD, CEO K. Satyanarayana Raju, “NIM is slightly lower due to pressure on cost of deposit. In the March quarter, the interest rates had risen to as high as 8.10 per cent. Even now I have seen that, some banks are holding interest rate at 7.93-7.94 per cent. So when incremental deposit garnering is being done at interest rate of 7.7-7.9 per cent, it will have impact on cost of deposit during the tenure of the deposit.” Higher cost of deposit, the MD said, affected all banks’ NIM by 7-13 bps, but Canara Bank’s NIM fell by only 2 bps sequentially to 2.88 per cent.

“Going ahead, our NIM could be at 2.85 per cent. I don’t see much movement in cost of deposit. Since the central bank has changed its policy stance to neutral, if there is reduction in repo rate, external benchmark linked advances will get revised immediately whereas deposits will take time to re-price,” he said.

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