Banks slip post RBI's circular to link lending rate to external benchmark; Moody's retains stable outlook

The benchmark indices ended with little change in the narrow trading on September 5 with Nifty able to hold above 10,800, while Sensex ended lower at 36,644.42.

The Nifty PSU Bank index was flat with Punjab National Bank up 2 percent followed by Union Bank of India. The top losers included Syndicate Bank, J&K Bank and OBC.

The S&P BSE Bankex ended 1 percent lower with the top losers being ICICI Bank, United Bank, Corporation Bank and Kotak Mahindra Bank.

The RBI has made it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs to an external benchmark effective October 1, 2019, according to a report bu Sharekhan.

The banks are free to choose one of the several benchmarks and are also free to choose their spread over the benchmark rate, subject to the condition that the credit risk premium may undergo change only when borrower’s credit assessment undergoes a substantial change, as agreed upon in the loan contract.

Sentimentally, it is negative for banks and NBFCs. Not only the Yield on advance for banks will be reduced, the margins are also likely be impacted. The move, will mean banks will have to faster re-price their deposits as well, which may reduce their competitiveness vis-a-vis other deposits.

The RBI has asked banks to do the change in incremental loans, not all existing loans as well, which somewhat softens the blow. Banks reset the interest rates periodically on the existing loans which provides them with some margins cushion in a falling interest rates scenario.

Negative for HFCs as well, as the competition will also force them to lower rates. Sentimentally, its is negative for PSU Banks, LIC Housing Finance etc, the report added.

Moody’s has affirmed a stable outlook for banks including Canara Bank, Oriental Bank of Commerce, Syndicate Bank and Union bank of India. The firm changed the outlook on Punjab National Bank to positive from stable.

“The affirmation of Canara Bank and Union Bank's ratings with stable outlooks reflects Moody's view that post-merger, the banks' credit profiles will remain stable over the next 12-18 months, supported by moderately improving asset quality and profitability," said the agency," Moody's added.