Banks caught in a trap

The cost of deposits is on the rise, but banks can't raise interest rate on close to 60 per cent of their loan books

- TAMAL BANDYOPADHYAY

BANKER'S TRUST The earnings season is over. Barring a few, most listed banks have recorded handsome net profits in the June quarter of the current financial year.

Their combined net profit has risen 21.04 per cent on a year-on-year basis.

For a few banks, bad loans as a percentage of total loans have risen, but that's not alarming.

What are the two most critical parameters of banks' earnings that give us a clue as to how long the good run will continue? So far, all eyes had been on credit cost: The movement of bad loans and the provision coverage or how much a bank sets aside to take care of such loans. Higher provision, coupled with recovery, brings down the pile of net bad loans and adds muscle to a bank's balance sheet. The focus should now shift to the cost of deposits and the net interest margin (NIM), loosely the difference between what a bank spends on deposits and what it earns on loans.

Bandhan Bank Ltd had the highest NIM in the June quarter at 7.6 per cent, followed by IDFC First Bank Ltd (6.22 per cent) and RBL Bank Ltd (5.67 per cent). On the other end of the spectrum are Jammu & Kashmir Bank Ltd (0.96 per cent), Yes Bank Ltd (2.4 per cent) and Punjab & Sind Bank (2.69 per cent).

For most banks, the NIM was compressed in the June quarter compared with the year-ago period, and even the previous quarter. For a few of them, the drop is very sharp. For instance, IDBI Bank Ltd's NIM dropped to 4.18 per cent in the June quarter from 4.91 per cent in the quarter ended March.

In April-June last year, its NIM was 5.8 per cent. Catholic Syrian Bank Ltd's NIM dropped from 5.04 per cent to 4.36 per cent; for Indian Overseas Bank, the drop was from 3.53 per cent to 3.05 per cent. All in one quarter.

Isn't that surprising when most banks are chasing retail assets? Typically, the yield or return from retail loans is higher than corporate loans. There's a catch; I will come to that later.