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Informist, Thursday, Feb. 13, 2025

 

--Fitch: Pressure on India bks' NIM to be moderated by RBI easing liquidity 

--Fitch: Indian banks' NIMs to fall by 10 bps on average in FY26 

--Fitch: Indian banks' NIM to trend towards long-term average of about 3% 

--Fitch: Indian bks' loan growth easing to 13% in FY26 to ease funding needs 

 

MUMBAI – Easing of liquidity conditions for banks by the Reserve Bank of India should moderate the pressure on banks' net interest margins from cuts in the repo rate, Fitch Ratings said on Wednesday.

 

The rating agency estimates net interest margins of Indian banks to fall by 10 basis points on average in 2025-26 (Apr-Mar). This comes against the backdrop of the 25-bps repo rate cut by the RBI's Monetary Policy Committe on Friday to 6.25%, and the additional 25-bps rate cut Fitch expects from the rate-setting panel in FY26.

 

"The immediate effect (of fall in NIM) will be felt on floating loans linked to external benchmarks, such as housing and SME loans, but will also be felt through fresh loans in a declining policy rate environment," it said. As the rate-setting panel's decision to cut the repo rate by 25 bps on Friday was in line with the rating agency's expectation, it is unlikely to drive changes in rated banks' credit profiles, Fitch said. 

 

For the six months ended September, the net interest margin of the Indian banking sector remained healthy at 3.5%, marginally below 3.6% in FY24, due to the upward repricing of deposits under tight liquidity conditions, Fitch said. The rating agency estimates the banking sector's margin to trend towards the long-term average of about 3%, amid slower loan growth and lower yields. 

 

"System liquidity pressures have moderated since late January 2025, due in part to RBI actions, including durable liquidity injections through open market operations and other, short-term liquidity measures, but has so far been insufficient for banks to lower their deposit costs," it said. 

 

Banking system liquidity has been in deficit since mid-December, with market participants attributing the tightness to the RBI's spot dollar sales in order to soften the rupee's depreciation. The RBI's daily net liquidity injections – a proxy for the systemic liquidity deficit – averaged around INR 2 trillion in January. The net liquidity injected hit its highest in a year on Jan. 23, at INR 3.16 trillion. Liquidity conditions have been slightly easier so far in February, but the RBI has had to conduct daily variable rate repo auctions in record sizes to keep overnight rates anchored.

 

The rating agency said if banks are unable to bring deposit costs down in line with falling policy rates due to tight liquidity, their net interest margins could narrow faster than expectations. With the evolving liquidity conditions, along with further policy rate cuts, the impact on banks' net interest margins and overall profitability would be a key factor to watch, it said. 

 

The rating agency estimates moderation of loan growth to 13% in FY26 from 14% in FY25, to ease funding requirements. It also expects the RBI to bring in additional mesaures to improve liquidity conditions and postponement of the implementation of a proposed liquidity coverage ratio requirement from Apr. 1, in line with RBI Governor Sanjay Malhotra's recent indications, and the implementation of international financial reporting standards. "The reforms could otherwise tighten system liquidity and impact earnings - though the reprieve would come at the expense of continued regulatory forbearance," Fitch said.

 

High recoveries from written-off loans and lower operating costs due to increasing digitisation may mitigate the impact on net interest margin as policy rates ease, Fitch said. It also estimate that banks might get some near-term support from delays in implementing higher deposit run-off rates and expected credit losses until after FY26. 

 

Fitch said non-banking finance companies may also see pressure on net interest margin in segments where they face competition from banks, such as near-prime urban housing or commercial loans. However, the rating agency does not expect non-banking finance companies's borrowing costs to ease by the same degree due to RBI's stricter regulatory restrictions on bank lending. 

 

Lower rates may provide relief to higher-risk borrowers in retail and small and medium enterprises segments, but credit costs are expected to rise as fresh loans were underwritten in recent years, Fitch said. It added that credit costs will continue to be the most important driver of the core overall operating profit or risk-weighted assets metric due to banks' moderate income buffers.  End

 

Reported by Ashna Mariam George 

Edited by Avishek Dutta

 

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