Banking shares tumbled on Wednesday, led by State Bank of India (SBI) which declined nearly 8 percent. Kunal Shah, senior vice president and head - BFSI research at Edelweiss Financial Services, shared his views on the banking sector.

“Yesterday SBI reset their lending rates linked to the external benchmarks and they have set the rate at 8.05. So that is almost 265 basis points (bps) premium and spreads over the repo rate. So when we compare this with the existing marginal cost of funds based lending rate (MCLR), it is 10 basis points (bps) lower. Accordingly, when we look at the home loan rates, that has been reset down to 8.2 percent. India over last one decade has seen almost four lending rates regime starting from benchmark prime lending rate (BPLR) to base rate to MCLR and now externally linked benchmark rates but in the initial phase when it gets introduced banks more or less set it near the existing rates and that is what has happened. It is hardly 10 bps decline. So it is being set near to where the MCLR was prevailing,” Shah said on Thursday.

“Going forward, with every cut in repo now they will have to pass it on in terms of the lower lending rates but that too is on the incremental loans, on the floating rate loans and retail as well as to the SME segment. So that would impact the incremental margins for them to some extent but to entirely get reflected in terms of margins, we had seen across the previous regimes that it takes a couple of years till the entire book gets reset to the new regime,” he added.

“Our preference in banking is towards private banks. ICICI Bank is our top pick within this space wherein we have a target price of Rs 585 and that is followed by HDFC Bank,” he said.

On non-banking financial companies (NBFCs) he said, “Within NBFCs we prefer players which are comfortable on the liquidity position wherein there is parental advantage and wherein there is not too much of a credit risk associated with them. So our preference within the NBFC lies with HDFC and Mahindra Finance at this point in time.”