Watch out! Rate wars in store for public, private sector banks

An interest rate war is brewing among banks, public- and private-sector as competition intensifies to grab a greater share of the retail, small and marginal enterprises loan market.

That’s according to experts who attended the ICICI Securities (I-Sec) annual banking and financial services conference in Mumbai, which brought together 25 companies.

An interest rate war will probably add to the woes of the banking system, already struggling with cooling corporate loan demand and tighter capital adequacy norms (Basel III). The conference focused on various issues the sector could grapple with in the near future. Here are highlights:

•Basel III norms: With new capital adequacy norms coming into play, which according to some industry experts, is stricter in some ways than for their international counterparts, most banks will have to raise additional capital to comply with Basel III norms.

According to the new norms, the overall capital structure will require a higher proportion of equity. That could push up the cost of capital as debt is usually cheaper than equity. Since the equity base increases, the return on equity also comes down.

However, better capital strength will ensure the banking system becomes more capable of withstanding financial shocks. That reduction in risk will eventually result in a reduction in the cost of equity. That could leave valuations unhurt.

•PSU banks: Asset quality remains the core focus here as banks will put in more effort for better loan recoveries. I-Sec says the pace of corporate loan restructuring will slow down only after the first quarter of the current financial year.

Loan growth, however, will not be too strong. As more PSU banks focus on the retail segment, there could be some ‘rate wars’, which could keep current and savings account rates high.

•Private sector banks: According to the post-conference report, private banks seem more confident than public-sector ones as they remain positive on growth opportunities in the retail and SME space; these institutions expect 20-30 percent growth in loans in the current financial year over a year from a year ago. They’re also keeping the focus on secured lending so that asset quality does not go for a toss. But the threat of rate wars looms here too.

**•**Gold companies: Assets under management with the gold loan firms is expected to moderate, while yields are expected to decline as the business aligns to a lower loan-to-value regime. Under new rules, banks can dole out less money as loan in exchange for gold collateral. Gold loan companies could shift more towards bank borrowings for funding, while cost control will remain the key focus to drive profitability.