Lending rate cuts may help alleviate NPA pain

The ongoing sharp reduction in lending rates will not be margin dilutive for the banks but rather help them tide over the bad loans pains as it will help the struggling corporates begin to pay back their loans, says a report by leading Wall Street brokerage Jefferies.

The ongoing sharp reduction in lending rates will not be margin dilutive for the banks but rather help them tide over the bad loans pains as it will help the struggling corporates begin to pay back their loans, says a report by leading Wall Street brokerage Jefferies.

"We don't think the 30-90 bps MCLR reduction by banks led by SBI is margin dilutive for the banks. In the shorter term of one to two quarters, we don't think these reductions could be NIM-dilutive, and even if it is, it would be relatively small," Jefferies said in a note today.

Explaining its contrarian view, the brokerage said the "implication of the rate cut on corporate profitability and improvement in interest coverage ratio (ICR) can be material for certain corporates given the extent of MCLR cuts and hence the bad loan outlook can turn slightly better for the banks."

It also argues the fundamental difference between base rate and MCLR is that under the latter, banks have the ability to choose 'interest reset dates' and as a result, an MCLR increase/cut doesn't translate to a higher or lower borrowing cost soon for customer as it happens over a period of time.

Following the Prime Minister's indirect nudge on the New Year's eve, banks led by State Bank, PNB, Union Bank and HDFC have slashed their marginal cost of funds based lending rates between 30 and 90 bps. SBI cut it the maximum of 90 bps.

The report also said since most banks were maintaining a 60-90 bps spreads since the MCLR regime to into being, it was clear that banks would pass on the cheaper deposits benefit to lower lending rates.

Large accretion to Casa deposits after the note ban and caps on withdrawal have sharply lowered overall cost of funds for banks. SBI, which as collected over Rs 1.65 trillion in Casa deposits, has even cut its base rate by 5 bps.

However, rate cut is negative for NBFCs, especially for those dependent on wholesale/bond market financing, as they could likely face a squeeze in spreads on incremental volume. 

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