Lending margins, a crucial indicator of Indian banks’ profitability, are expected to rise as a result of the country’s plan to eliminate its highest-value currency note, which will increase bank deposits.
According to a letter from Axis Mutual Fund, the Reserve Bank of India’s decision to discontinue the 2,000 rupees ($24) notes will increase bank deposits and reduce their cost of financing. According to asset management, the action might increase deposits by up to 2 trillion rupees by the time the deadline for exchanging the notes arrives at the end of September.
As demand for loans outpaces the growth in deposits, the net interest margin, which is the gap between a bank’s lending rate and the amount it pays for deposits, will shrink in the year ending on March 31. According to the RBI, banks have deposits of 18.4 trillion rupees as of May.
According to Madan Sabnavis, chief economist at the state-run Bank of Baroda, banks’ margins could increase as the rush to deposit the high-value currency notes before the deadline picks up speed.
According to Virat Diwanji, group president and head of consumer banking at Kotak Mahindra Bank Ltd., the increase in low-cost deposits, also known as current accounts and saving accounts, would result from the inflow of notes, lowering the overall cost of funds for the lenders and enhancing their margins.
Gains, however, might not last long because people will start taking their money out. Nevertheless, a note from CareEdge Ratings Ltd. suggests that short-term deposit rates may decline for the time being, muddling the effect of rising deposit rates on margins.