Source: The Economic Time
Mumbai, April 30: It is expected that interest rate cuts promised by the Reserve Bank of India will soften profitability across banks during FY26, as according to domestic ratings agency CRISIL, one of the major metrics—Return on Assets (RoA)—was said to decline. RoA is expected to attenuate by 10 to 20 basis points, which means RoA will fall to 1.1–1.2% in FY26 from a 20-year high of 1.3% in FY25, as announced by CRISIL.
In line with that, they stated that bank NIMs will overall come down to 2.8-2.9 percent in FY26, lowering their projections by 0.10-0.20 percent. There had been 0.10 percent compression for FY25 as well, but it is manageable because the credit cost has come down.
“Of the loan assets, 45 per cent are linked to an external benchmark, primarily repo. Typically, these are repriced rapidly after rate cuts. On the other hand, any reduction in term deposit (TD) rates will apply only to incremental deposits and renewals, resulting in a slower transmission of the reduction to the liability side,” its director Subha Sri Narayanan said
The Reserve Bank of India’s commitment to maintaining adequate systemic liquidity, as seen in the recent shift to a surplus position and the tweak in liquidity coverage ratio, which improves the metric by 6 percentage points, will help lenders, it said.
Vani Ojasvi said a 0.25 per cent reduction in the savings account rates by all banks can lead to an expansion of 0.06 per cent in NIMs, while a similar cut in TDs can yield a 0.04 percent benefit.
Stabilized credit costs, flat operating metrics
With regard to other income and operating expenses, CRISIL assumes an almost unchanged going forward. After having bottomed out through years of decline, it does not look good for any further improvement in credit costs. Hence any deviation in contraction of NIMs will affect the RoA directly after accounting for taxes.
Liquidity Support from the RBI Providing Some Relief
The Reserve Bank has kept smooth liquidity at the center stage to help with transmission of monetary concerns. CRISIL further states that the recent switching into a liquidity surplus, together with improvements in liquidity coverage ratios by as much as six percentage points, will act as a buffer for banks.
