MUMBAI: Finance minister P Chidambaram has told the chief executives of state-owned banks not to be obsessed with higher margins and instead attract borrowers with lower interest rates. Bank managements, according to him, should be happy with a 3% margin - a suggestion that has not gone down too well with bankers........
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The Finance Minister's advice to banks to cut down on their Net Interest Margin (NIM) to 3 per cent is timely State Bank of India’s NIM was 3.85 per cent, as on March 12,2012. The domestic and foreign NIMs were 4.17 per cent and 1.70 per cent, respectively. The Bank’s Indian customers are subsidising their foreign counterparts. Its Chairman has correctly said that an international comparison is not appropriate because in foreign countries provisions are taken ino account in computing NIM. There is also the argument of another expert that banks abroad do not have a Cash Reserve Ratio (CRR) that is a source of loss of income to Indian banks. It is not correct.There is a reserve ratio on transaction deposits in USA.The European Central Bank has also prescribed the ratio. Our banks should present comparable figures for NIM taking into account the above-mentioned features to justify their stand. The fact remains that while banks are quick in responding to hikes in CRR by lowering deposit rates they are slow in raising deposit rates when it is reduced. As one Chairman has pointed out the high NIM may be symptomatic of adverse selection on the part of banks that are financing unviable projects just because of the high lending rates. It may be one of the reasons for the rising non-performing assets of banks.There is a moral hazard in prescribing high rates for good borrowers to make up for the sins of the defaulting clients.
A. Seshan, Mumbai
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