Final week, the RBI began its rate-cutting cycle by reducing its key coverage charge by 25 bps to six.25% and mentioned it will be watchful and proactive with liquidity measures, given the banking system has been in a liquidity deficit for the final two months.
“The rapid impact will probably be felt on floating loans linked to exterior benchmarks, corresponding to housing and SME (small and medium enterprises) loans, however will even be felt by means of contemporary loans in a declining coverage charge setting,” Fitch Rankings mentioned in a press release late on Wednesday.
Non-bank monetary establishments may additionally see strain on web curiosity margins (NIMs) — the distinction between curiosity earned and paid — in segments the place they compete with banks, corresponding to near-prime city housing or business loans, the score company mentioned.
Whereas the pass-through to mortgage charges ought to occur instantly, analysts count on a short-term hit to banks’ NIMs since deposit repricing comes with a lag.
Indian banks’ NIM remained “wholesome” at 3.5% from April to September, Fitch mentioned, noting the dip from about 3.6% in fiscal 2024 was partly because of the upward repricing of deposits as liquidity tightened. “We consider the sector’s NIM will development in the direction of the long-term common of about 3% amid slower mortgage development and decrease yields,” Fitch mentioned. Nevertheless, it warned that if tight liquidity prevented banks from reducing deposit prices in step with falling coverage charges, their NIMs may slender sooner than anticipated.
The banking system’s liquidity hit a one-year excessive of over three trillion rupees ($34.31 billion) in January and was above 2 trillion rupees on Wednesday.
Fitch mentioned banks may get some near-term assist from delays in implementing greater deposit run-off charges and anticipated credit score losses till after 2025-26.
