New Delhi, October 4
If the Reserve Bank of India goes for a potential 50 basis point (bp) cut in the repo rate, it is expected to negatively impact the net interest margins (NIMs) of large private banks by 15-20 basis points, highlighted a report by Nomura.
The report added that this is mainly because 30-60 per cent of their loan portfolios are directly linked to the repo rate or other external benchmarks. While loan rates may adjust quickly to the cut, the banks' liabilities, such as deposits, are on fixed rates and only reprice lower upon maturity. This leaves the banks exposed to a negative impact from any rate cuts.
"A potential 50bp repo rate cut negatively impacts NIMs by 15-20bp for most large private banks;..... banks have 30-60 per cent of their loan books directly linked to the repo rate or external benchmarks" the report added.
It said from a maturity perspective, only about 14-22 per cent of banks' term deposits are set to mature in less than a year, with the majority--65-70 per cent--maturing in 1-3 years. This means that banks won't immediately benefit from lower interest costs on deposits, which could further squeeze their margins.
The report highlighted that the impact of the repo rate cut will differ across banks. Smaller private banks such as IndusInd Bank (IIB), AU Small Finance Bank (AUBANK), and Bandhan Bank are expected to face less pressure on their NIMs. This is because they have a larger share of fixed-rate loans in their portfolios, which makes them less sensitive to changes in the repo rate. As a result, the rate cut will have a smaller impact on their earnings compared to larger private banks.
"Smaller private banks (e.g., IIB, AUBANK and Bandhan) have higher share of fixed-rate loans and hence would see lower impact on NIMs" said the report.
As per report, State Bank of India (SBIN) is also expected to face a lower impact, with a potential 12 basis point decline in its NIM, as a significant portion of its loans is linked to the Marginal Cost of Funds-Based Lending Rate (MCLR).
In contrast, larger private banks are projected to experience a more pronounced decline in their NIMs, ranging from 15-20 basis points.
Overall, while the rate cut may provide some relief to borrowers, it poses challenges for banks in managing their profitability.