Falling interest rates to pressure bank earnings; RoA to moderate from FY24 highs

Time of India

30-04-2025

Faster reduction in loan rates compared to deposit rates in a falling interest rate scenario is expected to squeeze banks' net interest margins, in turn exerting pressure on the
profitability of lenders
.
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The return on assets (RoA), a profitability metric, is seen moderating 10-20 basis points to 1.1-1.2% in FY2026 from an over-two-decade peak of ~1.3% in fiscal 2024 and 2025, according to
CRISIL Ratings
.
Overall, bank NIMs will see a 10-20 bps compression to 2.8-2.9% in fiscal 2026, the rating agency estimates.
'With other income and operating expenses — the other major components of earnings — seen flat, the compression in NIM will directly translate to a moderation in RoA after accounting for the tax impact,' the rating agency said in a note Wednesday.
'Apart from NIMs,
credit
costs also have a bearing on bank earnings. While a secular decline in credit costs has supported profitability in the past few years,
Crisil
Ratings estimates that they have bottomed out.'
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The Reserve Bank of India has reduced policy repo rate by 50 bps since February.
According to Crisil, around 45% of loans are linked to an external benchmark, primarily repo rate. Typically, these are repriced rapidly after rate cuts.
On the other hand, transmission of rate cuts is slow on the deposit side because the reduced term deposit rate is applicable only to incremental deposits and renewals. Data shows only ~21% of TDs are maturing in a year, which means the rest will be due for repricing only after this fiscal, it added.
The extent of reduction in NIMs will depend on the ability of banks to manage their deposit costs. But given the competition for deposits seen of late, that ability will be curtailed, CRISIL said.
A few large ones have reduced not only the TD rates but also their savings account rates.
'If all banks were to implement a 25 bps cut in their savings account rates, it would, ceteris paribus, result in a 6-7 bps NIM benefit this fiscal. A similar cut in the TD rates would yield an ~4 bps NIM benefit,' said Vani Ojasvi, Associate Director, Crisil Ratings.
On
asset quality
, the rating agency estimates banks' gross
non-performing assets ratio
in the range of 2.4-2.6% by March 2026 compared to around 2.4% on March 2025. While corporate NPAs are expected to remain low, in retail and some MSME segments, borrower over-leveraging bears watching. Hence, credit costs are unlikely to reduce further from here.