“Of the loan assets, 45 per cent are linked to an external benchmark, primarily repo. Typically, these are rejected 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.
In addition to NIMS, credit costs are also related to profitability, which bottomed out after secular declines for many years, the agency said.
In addition, other revenues and operating expenses are also considered flat. Therefore, after considering the tax impact, compression in NIM will be directly translated into moderation in ROA.
Therefore, the extent to which NIMS is reduced will depend on the bank’s ability to manage its deposit costs. But given the recent seen competition for deposits, the agency said, the capability will be limited. It said the RBI is committed to maintaining adequate system liquidity, which could help lenders in a recent adjustment to surplus status and liquidity coverage, which would help lenders. Commenting on the cuts in deposit rates, its deputy director Vani Ojasvi said that a 0.25% reduction in savings account rates for all banks could result in a 0.06% increase in NIMS, while similar cuts in TDS could generate a 0.04% gain.
Overall, the bank NIMS will compress 0.10-0.20% in FY26 to 2.8-2.9%, adding that they also compressed 0.10% in FY25, but banks are able to manage it due to the decline in credit costs.
