The Financial Express (Delhi Edition)
Rising yields squeeze banks, hold back cheaper loans
Mumbai, June 19: Benchmark government bond yields have hardened back to January levels despite three interest rate cuts this year, a shift that is eating into banks' profits and hampering efforts to get them to pass on lower lending rates.
“This is a very anomalous situation where rates are getting cut and yields are hardening,” said SBI chairman Arundhati Bhattacharya. The benchmark 10-year bond saw its yield jump to a six-and-a-half month high of 8.12% on Tuesday, although it has since eased to 7.88%.
In contrast, when the RBI cut its policy rate by an equivalent 75 bps over the early months of 2013,10-year bond yields dropped 60 bps — encouraging banks to pass on the cut faster.
“Transmission will take time. In 2013, when rates came down, at that point in time credit growth was 2024%. So, banks could make up in volumes what they lost in the margins,” Bhattacharya said. “Banks don't have the volumes today to make it up.” Since January, the Reserve Bank of India has cutits policy reporate-by a total of 75 bps, but most banks have so far lowered their base lending rate by only about 25 bps, a major concern for the RBI.
Typically, the bond market mirrors the central bank's policy stance. But a combination of global uncertainty
ARUNDHATI BHATTACHARYA chairman, SBI Transmission (of rate cuts) will take time. In 2013, when rates came down, credit growth was 20-24%. So, banks could make up in volumes what they lost in the margins... Banks don’t have the volumes today to make it up
and stern RBI statements on inflation have dimmedhopeof furthercuts this year, pushing up yields.
Slowing foreign investment has also driven borrowing costs up, for both the government and corporate borrowers.
The AAA-rated 10-year corporate bond yield has risen closer to its January level at 8.55% after falling to nearly an 18-month low of 8.19% in early March.
The banking sector, dominated by state-run lenders, is struggling under a bad debt load that continues to grow, forcing many banks to take increased provisions against losses, adding to pressure on bank profits.
But banks will continue lending to the government bybuyingitsbonds.SBIsays government securities make up roughly 28% of its book, well above government prudential requirements, given weak overall lending.
“It’s a vicious cycle for banks,” a senior trader with a state-run lender said, estimating a loss of around R5,000 crore on government securities trading for the largest state-run banks in April-June.