MARCH 15, 2007: The rising interest rates are expected to start denting profits of banks from the second quarter of 2007-08. Banks have so far succeeded in passing on almost the entire increase in cost of funds to the borrowers, but are close to reaching a point where it won't be possible to transfer to borrowers the entire burden of increase in interest costs.

The increase in interest cost for individual borrowers has been over 300 basis points since January 2006 and for large corporate about 500 basis points as banks reduced the sub-PLR margins.

The increase in equated monthly installments for home loans has generally outstripped increase in salaries of individual borrowers over the last one year. Nayar said the growth in consumer credit has moderated which would lead to overall growth slowing closer to 20 per cent.

Large companies have not been borrowing from the banking system as they either had internal surpluses or were borrowing from the overseas market, which has been cheaper compared to raising rupee resources. Bank credit has been growing at around 30 per cent for the third year in a row, as the economy expanded at an average rate of over 8 per cent over these years.

The credit growth has been primarily driven by retail loans, particularly home loans. The share of retail loans in total loans is now closer to 30 per cent from less than 20 per cent about three years ago. At the end of March 2006, retail credit accounted for nearly 26 per cent of total.

 

Source: Rediff