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Declining interest rates are not favourable for banks' net interest margins in the short term. According to a report by PhillipCapital, the net interest margins (NIM) of banks are going to moderate in FY25 and FY26, before rebounding in FY27.The report added that a 100 basis point cut in the repo rate and substantial liquidity in the system are conducive to deposit growth at cost-competitive rates.The Reserve Bank of India (RBI) has reduced the repo rate by 100 basis points since February 2025.The report highlights that Banks such as ICICI Bank, DCB Bank, AU SFB, and Axis Bank are expected to experience minimal impact on NIM compression, while others like HDFC Bank and SBI may see a moderate impact. Conversely, IIB and Bandhan Bank are projected to face the highest impact because of shifts in their loan mix.However, bank asset quality continues its upward trajectory, with stressed assets steadily declining across both private and public sector banks. As of FY25, credit costs are below the long-term average, reflecting improved underwriting standards and effective asset resolution.
While major stress events like the corporate NPA cycle and COVID-related surges in unsecured NPAs are largely in the past, some signs of stress persist in low-ticket unsecured loans. Early-stage microfinance stress has moderated, and credit card delinquencies appear to be peaking, suggesting a potential easing of credit costs ahead. Home loan asset quality remains stable, with Public Sector Banks (PSBs) increasing their market share in new originations.Similarly, vehicle loan stress remains contained, with stable metrics despite some early bucket increases in FY25.Furthermore, the PhillipCapital report also reveals that, credit demand is pegged at 1.1 times of the nominal GDP growth, with the sector's credit growth anticipated to be in the 11-12 per cent range for FY26. A notable pickup in unsecured retail loans is expected in the second half of FY26, driven by easing stress and improved borrower savings. Private banks, which previously lost market share in various retail segments, are likely to regain ground as credit risk subsides. (ANI)
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