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Banks' Profit Squeeze: RBI Urged to Act Fast
3 Dec
Summary
- State banks flag deposit rate lag to RBI, impacting balance sheets.
- Lending rates fall faster than deposit rates, narrowing net interest margins.
- Competition from mutual funds and other savings products hinders deposit growth.
Indian state-owned banks have expressed serious concerns to the Reserve Bank of India (RBI) regarding the sluggish transmission of policy rate cuts to deposit rates. While lending rates have adjusted swiftly due to external benchmarks, deposit rates are repricing at a much slower pace, leading to a compression in banks' net interest margins. This imbalance forces banks to convey their financial strain to the regulator, impacting their overall profitability.
The core issue lies in the rapid repricing of assets linked to external benchmarks, contrasted with the delayed adjustment of existing deposit rates. Bankers have noted that only fresh deposits are repriced, and at a significantly slower rate. This asymmetry is exacerbated by intense competition for household savings from mutual funds and other financial instruments, which have diverted funds away from traditional bank deposits and strained current and savings account ratios.
Banks are seeking RBI intervention to improve deposit growth and rebalance the transmission mechanism. Suggestions include infusing liquidity into the system, providing a roadmap for policy rates to aid liability pricing, and potentially lowering government small savings interest rates. The exploration of globally common products like floating-rate deposits has also been proposed to align asset and liability repricing more effectively.
