KOCHI: As borrowers cheer the prospects of more repo rate cuts from the Reserve Bank of India (RBI), banks are quietly bracing for the uncomfortable aftermath – a mandatory trimming of lending rates that eats into their margins, all while they struggle to retain increasingly precious deposits.
Market chatter is rife with expectations of more accommodative moves from the central bank. But for banks, the jubilation stops short.
Each rate cut means floating-rate loans linked to external benchmarks – primarily the repo rate – must see a corresponding reduction in borrowing costs within a maximum of three months.
And that, for banks already facing intense pressure to shore up liabilities, is turning into a financial and strategic juggling act.
Shifting reset strategy
According to banking insiders, many banks are now recalibrating the structure of new floating-rate loans. The new mantra: stretch the reset period to the maximum allowed – T+90 (90 days after the repo rate change) – from the T+1 (next-day reset) cycle that several had adopted during the rate-hike cycle.
This shift buys banks time to delay the margin hit in a falling interest rate environment.
“In order to enhance net interest margin (NIM) stability, we have started resetting new floating-rate loans at T+90 instead of T+1,” said KVS Manian, MD & CEO of Federal Bank, the largest private-sector bank based in Kerala, during an analyst call.
The bank is also moving to fixed-rates in certain loan categories, shifting car loans and medium-tenure business banking loans to fixed-rate structures – a move aimed at managing rate volatility more effectively.
Margin pain, deposit stress
The deeper challenge for banks, however, is that while the interest rates on floating-rate loans are tied to external benchmarks, deposit rates remain at the banks’ discretion – yet banks are wary of reducing them.
The fear: erosion of deposit bases in a fiercely competitive market where liquidity is tight.
“There are no regulatory compulsions on deposit rates, but we simply can’t afford to cut them aggressively without risking deposit flight,” a senior banker at a mid-sized private sector bank told businessbenchmark.news.
That puts lenders in a double bind. On the one hand, loans are bound to get cheaper, eating into margins. On the other, deposits must remain attractive enough to keep funds flowing in – leaving little room to maneuvre on pricing.
The scramble for deposits has pushed banks into an aggressive chase, offering higher rates or launching limited-time schemes to attract retail and institutional savers.
This situation, according to banking experts, is creating a mismatch in asset-liability management, especially as the lending portfolio becomes increasingly skewed towards external benchmark-linked instruments.
Strategic shift ahead
To navigate this squeeze, banks are tweaking their loan books – moving selectively towards fixed-rate products, rebalancing loan tenures, and reassessing customer segments.
Federal Bank, for example, is also eyeing the personal loan segment more actively while staying cautious on microfinance.
“As the credit environment stabilises, we will increase our focus on personal loans to capture growth opportunities. The microfinance portfolio needs continuous caution, and hence we are approaching it prudently,” Manian added.
As the RBI prepares for its next bi-monthly policy review, banks know that another rate cut may be popular with the public – but for them, it means yet another round of balancing acts, where retaining profitability could prove harder than ever.
