RBI Rate Cuts Could Dent Banks’ Profit Margins: Crisil

The Reserve Bank's rate cuts will lead to an up to 0.20 per cent slip in return on assets, a key profitability indicator, for banks in FY26, a domestic rating agency said on Wednesday.

Crisil Ratings said the RoA will contract by 0.10-0.20 per cent to 1.1-1.2 per cent in FY26 from an over-two-decade high of 1.3 per cent in FY25.

Compression in the net interest margin by a similar level will be the key driver for the slip in RoA, the agency said, explaining that in a falling interest environment, interest rates on loans are expected to reduce faster than those on deposits.

"Of the loan assets, 45 per cent are linked to an external benchmark, primarily repo. Typically, these are repriced rapidly after rate cuts. On the other hand, any reduction in term deposit (TD) rates will apply only to incremental deposits and renewals, resulting in a slower transmission of the reduction to the liability side," its director Subha Sri Narayanan said.

Apart from NIMs, the agency said, credit costs also have a bearing on the profitability front, and these costs have bottomed out after a secular decline for many years.

Additionally, the other income and operating expenses are also seen as flat. Hence, compression in NIM will directly translate to moderation in RoA after accounting for the tax impact.

The extent of reduction in NIMs will, therefore, depend on the ability of banks to manage their deposit costs. But given the competition for deposits seen of late, that ability will be curtailed, the agency said.

The Reserve Bank of India's commitment to maintaining adequate systemic liquidity, as seen in the recent shift to a surplus position and the tweak in liquidity coverage ratio, which improves the metric by 6 percentage points, will help lenders, it said.

Commenting on the deposit rate cuts, its associate director Vani Ojasvi said a 0.25 per cent reduction in the savings account rates by all banks can lead to an expansion of 0.06 per cent in NIMs, while a similar cut in TDs can yield a 0.04 per cent benefit.

Overall, bank NIMs will see a 0.10-0.20 per cent compression to 2.8-2.9 per cent in FY26, it said, adding that they had compressed by 0.10 per cent in FY25 as well, but banks were able to manage it as credit cost declined.

(This report has been published as part of the auto-generated syndicate wire feed. Apart from the headline, no editing has been done in the copy by ABP Live.)

business