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Jefferies questions feasibility of repo link to lending rates

Low ‘product profitability’ in home loans for banks like SBI will not allow rates to go down much.

, ET Bureau|
Aug 26, 2019, 07.17 PM IST
Mumbai: Despite the clamour for lower lending rates by banks, foreign brokerage Jefferies has argued that there is not much room for banks to pass on further cuts as margins in products such as home loans are wafer thin at around 1%.

On Friday the government announced measures to boost sagging growth which includes immediate release of Rs 70,000 crore capital to public sector banks which will boost lending and also linking bank lending rates to the benchmark repo rate which is on the way down.

In a report titled, External benchmark of loans: It’s the same old story, same old song and dance Jefferies analysts Nilanjan Karfa and Bhaskar Basu said low ‘product profitability’ in home loans for banks like SBI will not allow rates to go down much.

“While it can be argued that SBI has always been used as a flag-bearer when it comes to the 'interest rate' agenda for the government, the lending rate is broadly a function of cash return on capital invested (CROCI), admin expense, fund transferred priced cost of fund, net credit loss), of which 'product profitability' is key,” Jefferies said.

The analysts calculated SBI's home loan as an example in the June quarter. “The cost of funds was 5.07%, net credit loss 0.2%, while its realised lending yield for home loans was 8.59%, expenses of 1%, which implies pre-tax profitability at around 1% based on Jefferies estimates. Is that really so high that SBI can sharply lower rates?,” the analysts asked.

They pointed out that SBI had taken the lead by linking the savings bank rate to repo rate for accounts with balances more than Rs 10,000, but the bank has not been able to pass on the latest RBI cut to customers and instead kept savings bank rates at 3% possibly because of the risk of losing deposits to other government schemes or banks.

“What happens when repo rises sharply? Volatility of repo vs other benchmarks is higher and carries its own risk. There are limitations as to how low banks' cost of funds can be vs competing products like Post-office deposit, Sukanya Samriddhi, etc,” Jefferies said.

Also Read

SBI cuts deposit, lending rates

ICICI lowers lending rates by 10 bps

HDFC lowers lending rates by 10 bps to 8.25%

Central Bank of India reduces repo-based lending rate by 25 bps

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