Banks: Higher lending rates hold the key

Banks may not use any commodity inputs, but they have been in the pincer grip of rising costs as well. Rising interest rates, higher reserve requirements and the aggressive battle for market share have escalated costs for the banking sector in recent times. However, the performance of leading banks hasn't deteriorated sharply. Yes, banks' Net Interest Margins (NIM) have contracted due to the increased cost of funds, higher reserve requirements (due to CRR hikes) and yields on advances not rising in sync with costs. In the June quarter, HDFC Bank, Punjab National Bank and Kotak Mahindra Bank were better placed in terms of NIMs, while PSU banks have come off slightly worse, thanks to the cut in lending rates in February. Aggressive increases in lending rate in recent months, efforts to step up fee income and a more cautious stance on loans to riskier segments are the key ways in which banks are attempting to hold on to margins. For one, banks have hiked their PLR twice in as many months recently, to transfer the burden of higher costs to customers. The recent hikes in lending rates (as high as 150 basis points for some banks) more than made up for higher deposit rates and build in the possibility of future rate increases to some extent. Banks are also looking at other income (now 30 per cent of total income), from non-lending activities to bolster margins. This includes commission, exchange and brokerage and fees from distribution of 3rd party products, cross selling, advisory services and trading. Recently a few banks have increased fees on various services they are offering, also an effort to boost other income. Finally, banks are on an expansion spree, targeting areas where bank penetration is very low, for tapping into low-cost deposits. On the lending side, banks are aggressively targeting SMEs for their advances growth. Banks are also going slow on the advances that are more prone to default (personal loans, consumer durables) to prevent bad loans from escalating. M.V.S. SANTOSH KUMAR