Retail Customers Need Not Lose Sleep Over New Base Rate Norms: HDFC Bank
July 15, 2016

In a chat with ET Now, Ashish Parthasarthy, Hd-Treasurer, HDFC Bank, talks about the new base rate methodology for banks. Excerpts:

ET Now: What do the new base rate norms mean for the banking space? How will the differential rates with different tenors work? Could there be downward pressure on NIMs?

Ashish Parthasarthy: It’s difficult to tell at this point. The guidelines have turned out to be more complicated than expected. The rates are different for different tenors. But the cost basis is ‘all costs’. So, I do not know how it will eventually pan out.

My guess is that it will play out differently for different banks. That is because the cost structures of banks vary wildly. They could be different reference points like size of wholesale operations and retail operations, and even efficiency.

At this point only one likelihood appears clear, which is that the frequency of rate reset will increase. That will obviously reflect in the immediate deposit rates in the system.

In a scenario of falling rates, there could in that case be a marginal downward pressure on bank NIMs. It would be exactly the opposite when the scenario is one of rising rates.

ET Now: If I were a customer, should I have been worried over the cost of my loan?

Ashish Parthasarthy: I don’t see the need for that kind of a worry. From what I understand, the complication is for the bank, not for the customer.

Banks will now have to keep their focus on all four benchmark rates. While resetting the rates on a certain day, banks will have to bear in mind the deposits or outstanding liabilities of the previous day as well. That is usually a tough task.

For the customer, I do not think it makes much of a difference. The only way a customer could be inconvenienced is if the rate reset was made monthly. In such a scenario, the customer will be faced with monthly variation in rates — an irritating prospect.

Banking products will perhaps evolve to eventually be able to play this reset clause profitably. They do have the freedom to reset rates in different frequencies as long as the reset frequency is less than a year. So, you will ultimately have to move to slightly staggered resets. Otherwise, frequent changes will turn out to be headache.

For retail customers, a lot of loans other than home loans have a fixed rate. These include Personal Loans, car loans, etc. For them, these changes won’t matter.

ET Now: What about the impact on the margins of the banks?

Ashish Parthasarthy: It is too early to say anything conclusive. But I can say one thing with conviction that the impact won’t be big.

Under the new base rate regime, you are basically looking at pricing your reference rate at the deposit rates that are prevalent at this point. Now, consider the fact that your deposit base has a rate which remains fixed for some time. It means that in a falling rate scenario, there would be some reduction in NIMs.

But in a rising rate scenario, the NIMs will tend to expand. That’s because you will have the benefit of earlier deposits at prevalent rates.

So, it will work differently in different cycles. But the impact should not be very large. It will vary from bank to bank, and this variation could be significant.

ET Now: How do you expect the rupee to behave over the course of the next three months?

Ashish Parthasarthy: We are of the view that the rupee will tend to depreciate over a period of time. We see it operating in a range of 66 to 67.50 over the next three months or so.

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