KOCHI: The Reserve Bank of India’s relentless rate cuts to revive the economy are hitting banks where it hurts most t – their margins.
While the policy moves are aimed at boosting credit growth and fuelling consumption, they are simultaneously compressing banks’ net interest margins (NIM) – the thin spread between what banks earn on loans and what they pay on deposits.
Speaking to businessbenchmark.news, a senior banking official admitted that even before the most recent 25-basis-point rate cut in February, home loans priced at 8.5 per cent were barely profitable.
“We’re paying over 7.5 per cent to attract deposits. Add operating costs, and there’s hardly anything left in it for the bank. Home loans make sense only when you factor in the long-term customer relationship – savings accounts, cross-selling products including third party insurance and other products,” he said.
Now, with two consecutive cuts behind them and possibly more on the horizon, banks are being pushed to re-price loans downward while being unable – or unwilling – to reduce deposit rates in a still-tight market. Lending rates may need to align with the repo rate, but depositors obviously aren’t ready for the downside.
Catch – 22 situation
“It’s a catch-22,” said a source from a leading private sector bank in Kerala. “You want to stay competitive on lending, but you also can’t afford to upset depositors by slashing rates – they’ll simply walk across the street.”
As a result, some banks are quietly hitting pause on home loan pushes, carefully recalibrating their strategies in response to the RBI’s accommodative stance – a policy shift that suggests more cuts could be on the cards.
Market watchers now see the repo rate heading towards 5 per cent by the end of the fiscal year.
And while borrowers rejoice, bankers are biting their lips. Some lenders have already trimmed deposit rates, but analysts warn that such moves may not stick too long.
“It’s unsustainable,” said one. “Once they see deposits getting poached by rival banks offering better rates, they’ll have no choice but to roll back.”
For now, it seems banks must learn to lend for less – and hope that cross-sells and customer stickiness can plug the growing profitability gap.
But, here too, there’s a catch – After RBI drew a red line on banks pushing insurance products aggressively, the sale of insurance products has drastically dropped, according to a source at Federal Bank.
