Impact of RBI’s Potential Rate Cut on Indian Banks
The Reserve Bank of India (RBI) might reduce the repo rate by 50 basis points, which could affect the net interest margins (NIMs) of large private banks by 15-20 basis points, according to a report by Nomura. This is because 30-60% of their loans are linked to the repo rate or other benchmarks. While loan rates adjust quickly, deposits are fixed and only reprice upon maturity, exposing banks to negative impacts from rate cuts.
Only 14-22% of banks’ term deposits mature in less than a year, with 65-70% maturing in 1-3 years, meaning banks won’t immediately benefit from lower deposit costs, further squeezing margins. Smaller banks like IndusInd Bank, AU Small Finance Bank, and Bandhan Bank, with more fixed-rate loans, will face less pressure on NIMs. State Bank of India is also expected to see a smaller impact, with a 12 basis point decline in NIM due to its loans being linked to the Marginal Cost of Funds-Based Lending Rate (MCLR).
In contrast, larger private banks may see a more significant decline in NIMs, ranging from 15-20 basis points. While the rate cut may help borrowers, it presents challenges for banks in maintaining profitability.
Doubts Revealed
RBI -: RBI stands for the Reserve Bank of India. It is the central bank of India, which means it controls the money supply and interest rates in the country.
Rate Cut -: A rate cut means the RBI is lowering the interest rate at which it lends money to commercial banks. This can make borrowing cheaper for banks and, in turn, for people and businesses.
Basis Point -: A basis point is a unit of measurement for interest rates and other percentages in finance. One basis point is equal to 0.01%, so 50 basis points would be 0.50%.
Repo Rate -: The repo rate is the rate at which the RBI lends money to commercial banks. When the repo rate is cut, it usually means loans become cheaper for borrowers.
Net Interest Margin (NIM) -: Net Interest Margin is the difference between the interest income a bank earns from its lending activities and the interest it pays to depositors, expressed as a percentage of its total assets.
Fixed-rate Deposits -: Fixed-rate deposits are savings accounts where the interest rate is set for a specific period. The rate doesn’t change until the deposit matures, even if market rates change.
IndusInd Bank -: IndusInd Bank is a private sector bank in India, known for offering a wide range of banking products and services.
AU Small Finance Bank -: AU Small Finance Bank is a small finance bank in India that provides banking services to underserved and unserved sections of the society.
State Bank of India (SBI) -: State Bank of India is the largest public sector bank in India, offering a wide range of financial services to individuals and businesses.
