Banks could take a one-time hit of about Rs 20,000 crore on their profits, when they start following Reserve Bank of India’s new rules to calculate base rate from next fiscal, says ratings agency Crisil.
The Reserve Bank of India, late Tuesday, issued guidelines asking banks to follow the ‘marginal cost of funds’ method for computing their base rate from April 1, 2016.
“Our base-case is that profitability of banks will have one-time impact of around Rs 20,000 crore in fiscal 2017, which would be equal to 15% of the total estimated profit of the banking system for that year,” says Pawan Agarwal, chief analytical officer at Crisil.
Crisil estimates that the change in computing would lower the base rates by about 50 basis points from the current levels, and also reduce banking sector profitability because return on assets (RoA) will fall by 20 basis points in fiscal 2017, it says.
“The actual impact will depend on whether the banks will be given a leeway to make this shift over a longer time frame in the final guidelines.” Mr. Agarwal said.
Also, for every subsequent 25 bps cut in deposit rates, profits would be down by Rs 5000 crore in year from the rate cut, Crisil statement says.
Banks, however, could limit the impact by getting more short-term deposits and borrowings, adds Rajat Bahl, Director, Financial Sector Ratings. He further adds, that this could be limited as banks need to implement Basel-3 rules such as liquidity coverage ratio and net stable funding ratio.
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