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Banks' Margins Squeezed by Rate Cuts
15 Dec
Summary
- Banks cut lending rates, impacting net interest margins.
- Deposit rates remain high due to competition.
- Rate cuts may delay expected profit recovery for banks.
Following the Reserve Bank of India's recent policy rate reduction, leading banks like State Bank of India have decreased their marginal cost of funds-based lending rates (MCLR) by five basis points. This strategic move, implemented across various tenures, is anticipated to exert renewed pressure on banks' net interest margins (NIMs).
Bankers indicate that the recovery of these margins will likely be postponed. This is largely because deposit rates cannot be substantially reduced amid intense competition from alternative investment avenues such as mutual funds. Consequently, the anticipated improvement in bank profitability for the current quarter may be delayed.
While MCLR cuts directly impact a portion of bank loans, a significant number of retail and MSME loans are already repriced based on external benchmarks like the repo rate. Nevertheless, the overall effect of reduced lending rates, coupled with stable deposit rates, is expected to dent NIMs, with some growth in personal and SME loans offering a potential cushion.
