Banks, you can raise your lending roofs

Banks are reporting healthier interest margins as RBI's rate-cut cycle works to their advantage. Eight of the 24 banks have reported sequentially improved net interest margins (NIMs) in their quarterly earnings. Banks are lending more based on internal benchmarks, which reset slower than external ones. The composition of lending is shifting towards cost of funds. Credit growth continues to outpace deposits, which slows down policy rate movement for savers. By pushing more borrowers onto loans based on the cost of funds, banks are managing to slow down the impact of repo rate cuts on their loan books. RBI's liquidity injection is underway, and lending rates will reset, affecting interest margins. They will also have to pass on the policy rate cuts to depositors, with an additional impact on margins.

For now, though, banks have scope to work on their bottom line. GST and I-T cuts are expected to drive up credit growth, and deposits could lag. The capital market is providing support to bank lending, although it doesn't match the low cost of bank deposits. A rising cult of equity poses some risk of disintermediation for banks. But they are also in the middle of a structural business upturn. Effects of tax cuts on consumption will spill over to lending for producers. Households will also allocate the increased disposable income between credit-fed consumption and rebuilding savings. In either case, banks will be able to shore up their profitability metrics.

Banks should be able to meet rising credit demand with healthier reserves, while monetary transmission benefits from business benchmarked to the current cost of funds. They are also well-placed to unlock value in their subsidiaries as demand for financial products, such as insurance and MFs, rises.