Higher rates to hit bank profits

The gradual rise in both lending and deposit rates will affect the profitability of banks in 2007-08. Early signs indicate a pressure on net interest margins (NIMs). A CRISIL-FICCI study says the banking sector’s profitability is expected to decline this financial year.

The rating agency has, provisionally, projected the net profitability margin of banks at 1.4 per cent, compared to 1.6 per cent in 2006-07.

Banks like ICICI Bank, YES Bank and IndusInd, which have a lower share of low-cost deposits, are already feeling the pressure. The loan-to-deposit ratio (LDR) of these banks, a key indicator of cost, has been on the rise.

Higher ratios mean greater dependence on market borrowings, which are more expensive than low-cost deposits.

The study has also pointed out that while the inherent asset quality of the banking system has improved significantly, strong credit growth will bring its own risks, which may impact asset quality. In the first quarter of 2007-08, banks like ICICI Bank, UCO Bank, J&K Bank and IndusInd Bank have shown a marginal rise in their net NPAs.

The problem has still not become acute, but left unattended, it can. The need of the hour: an immediate reduction in interest rates. Is RBI Governor Y.V. Reddy listening?