Indian Banks’ Net Interest Margins Likely to Grow in FY23
A report by Moody's Investor Service claims that this could be a direct impact of the recent interest rate hikes announced by the RBI
Reserve Bank of India (RBI) has hiked interest rates in consort with similar moves by the United States as part of the global efforts to curtail inflationary pressures. Now, it appears that the apex bank’s move could help scheduled banks in India improve their net interest margins during the current financial year.
A Moody’s Investor Service report says NIMs – which is the difference between interest income and that paid by the bank to its interest-earning assets – was an obvious result of the interest rate hikes taken up by the RBI. Moreover, higher policy rates and favorable funding structure may also have contributed to the larger margins, the report said.
Moody’s says these measure could help generate higher returns on assets though the credit costs could either remain constant or may even decline during the current financial year. These had increase considerably during 2020-21 and 2021-22.
“In the case of India, the historic relationship between credit costs and inflation is distorted because of significantly delayed recognition of NPLs and bank restructurings that took place in 2016-18 when inflation was slowing. We expect Indian banks’ asset quality will improve in 2022-23 because of recoveries and write-offs of legacy NPLs,” the Moody’s report said.
Experts argue that surging inflation and the concomitant rate hikes had in fact pushed the real inflation-adjusted policy rates into negative territory which might adversely affect the number of depositors in the banks. And any decline in this area would eventually result in pressure over NIMs as there may be less to hand out to borrowers.
The Reserve Bank had increased the benchmark interest rates by 50 basis points to 4.9%, which still remains below the pre-pandemic levels.
Meanwhile, official data indicates that private sector banks in India had trebled their share of loans sanctioned to small businesses during the last fiscal year. While the share of public sector banks grew to 73%, private sector banks exposure to SMBs touched 69.8% on an annual basis.
Many private sector banks started cutting their exposure to small businesses when the pandemic broke out but with government guarantees coming in and stress turning out to be less than expected, they sharply increased their market share in FY22.
