Rate cut to dent BoI's margin by 2-3 basis points

Public sector lender Bank of India (BoI)’s net interest margin might be impacted by two to three basis points (bps) due to the 25-basis point reduction in its base rate.

Last week, BoI reduced its base rate by 25 bps to 9.95 per cent. The effect of the rate cut in absolute terms is expected to be over Rs 300 crore, BoI executives said. While the effect of interest income foregone is immediate, the benefit from reduction in cost of deposits would accrue over a period of time.

According to BoI Chairperson and Managing Director V R Iyer, about 70 per cent of BoI’s loan book is linked to base rate. The bank had seen its incremental cost of deposits declining by 20 bps over the second half of 2014-15, she said.

BoI began to reduce deposits rates in the third quarter of 2014-15. Its net interest margin for April-December 2014 stood at 2.18 per cent, down from 2.37 per cent during April-December 2013. The bank’s cost of deposits had shown a marginal rise to 5.72 per cent in nine months to December 2014 from 5.66 per cent in same period of FY14. The yield on advances stood at 8.43 per cent against 8.51 per cent a year ago.

Few banks have reduced their key lending rates after the Reserve Bank of India (RBI) cut the repo rate twice by 25 bps each since January 2015. Now the repo rate stands at 7.5 per cent.

RBI as well as the government had flagged the issue of banks’ reluctance to do “monetary transmission” or pass on the benefit of lower cost of funds to customers.

According to finance ministry data, as of April 15, following the reduction in the policy rate, of 91 scheduled commercial banks, 21 (four public sector banks, six private sector banks and 11 foreign banks) reduced their base rates in the range of 10-50 bps.

The weighted average lending rates on fresh rupee loans sanctioned by banks for housing and vehicle loans have also come down in the range of eight to 53 bps during the same period.

According to a BoI executive, the Mumbai-based lender has shed high-cost deposits worth Rs 25,000 crore in fourth quarter ended March to further reduce the cost of funds.

The total domestic deposits at the end of December 2014 stood at Rs 3,96,122 crore — of which low-cost deposits were 28.67 per cent.