Why are Indian banks facing a margin squeeze?

Banks face a margin squeeze because lending rates are falling much faster than deposit rates due to external benchmark linkages, slowing the repricing of liabilities.

What is the Reserve Bank of India's role in bank margins?

The RBI is involved as banks have approached it to discuss and seek interventions for the asymmetric transmission of rate cuts, which impacts bank profitability.

How does competition affect Indian banks' deposit growth?

Increased competition from mutual funds and other financial products is diverting savings away from bank deposits, hindering deposit growth and impacting banks.

Home / Business and Economy / Banks' Profit Squeeze: RBI Urged to Act Fast

Banks' Profit Squeeze: RBI Urged to Act Fast

3 Dec

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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.

Banks' Profit Squeeze: RBI Urged to Act Fast

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.

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