Daily interest to hit banks'margins

22 Feb 2010

1

State Bank of India chairman OP Bhatt says banks' margins could be expected to shrink 20-25 basis point after the bank introduces the new method of calculation of interest on savings account deposits from 1 April.

The Reserve Bank of India has directed banks to switch to a new system of calculation of interest based on minimum monthly balance involving daily interest calculation based on that day's balance. Currently banks calculate interest on the basis of minimum monthly balance held between the the 10th to last day of each month.

Bhatt says though margins would be hit over the short term, recovery will happen in the medium term as advances on yields rise. SBI's net interest maintain (difference between the costs of funds and yield on advances) was up from 2.30 per cent in June 2009 to 2.82 per cent in December 2009.

''The impact (due to change in interest calculation) will be 60 to 65 basis points on the saving deposit book, which is a third of our total deposits. So the overall impact will be 20-25 bps on NIM,'' Bhatt said. ''However, this cost can be absorbed because the average yield on advances will rise once the base rate comes into effect,'' he added.

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