SHRINKING MARGINS, RISING PRESSURES

Banks grapple with shrinking margins, deposit pressures, and lending shifts as the RBI resets interest rates

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Equity investors have been keenly tracking developments in the Indian banking space. On the negative side, a rate cut of 25 basis points by the Reserve Bank of India (RBI) in its February monetary policy will lead commercial banks to eventually lower their lending rates and take a hit on profitability. Adding to this, some elevation in delinquencies in recent months, especially in unsecured loans like personal loans and credit cards, and a likely fraud in the New India Cooperative Bank Ltd have added an element of caution towards the sector.

On the positive front, the RBI has decided to defer the implementation of the revised Liquidity Coverage Ratio (LCR) norms. Earlier, the RBI had planned to roll out the revised LCR norms as announced in July last year, by March '25. The new LCR rules required banks to hold aside a higher portion of liquid assets to meet any sudden liquidity demands during a crisis. Now, the RBI will provide a phased rollout of the new LCR guidelines by March '26 instead of March '25. This implies that banks will now have more money to lend in the near term.

To point out, the overall health of the banking sector remains robust and well-placed for the long term as it plays an important role in providing credit to important sectors of the economy. Bad debt, as measured by gross non-performing assets (GNPAs) of scheduled commercial banks (SCBs), has fallen to a 12-year low of 2.6% as of September '24. The net non-performing asset (NNPA) ratio of SCBs has reduced to an all-time low of 0.6% in the October-December quarter of the ongoing FY24-25.

Banks have cleaned up their balance sheets over the last one decade and have also written-off bad debts. Commercial banks are evolving at a faster rate, adopting new technologies to fix gaps on the asset and liability front and meet credit demands of the economy over the long term.