RBI's Rate Cut: A Double-Edged Sword for Banks

A potential 50 basis point repo rate cut by the Reserve Bank of India could lower net interest margins for large private banks, according to Nomura. Smaller banks, with more fixed-rate loans, may see less impact. Interest costs on deposits won't drop immediately, squeezing banks' margins further.

The Reserve Bank of India's potential 50 basis point cut in the repo rate is forecasted to adversely affect the net interest margins (NIMs) of large private banks by 15-20 basis points, according to a report by Nomura. The report attributes this to 30-60% of their loan portfolios being directly tied to the repo rate or other external benchmarks.

The report further explains that while loan rates might quickly adapt to the cut, fixed-rate liabilities like deposits only reprice upon maturity. This puts banks at risk of negative impacts from rate reductions. Large banks, with a majority of term deposits maturing in 1-3 years, won't see immediate relief from reduced deposit interest costs, potentially squeezing their margins further.

Notably, smaller private banks such as IndusInd Bank, AU Small Finance Bank, and Bandhan Bank may feel less pressure on their NIMs, given their higher proportion of fixed-rate loans. Meanwhile, State Bank of India is anticipated to experience a modest 12 basis point hit, thanks to a significant chunk of its loans linked to the Marginal Cost of Funds-Based Lending Rate. Borrowers might benefit, but banks will grapple with profitability challenges.

(With inputs from agencies.)