Indian banks recorded heightened profits in the past quarter despite looming troubles resulting from deposit levels and the high cost of funding. While the picture of the Indian lending space has shown some signs of improvement with moderating CASA, the rising operational expenses at hand might dampen the euphoric image.
According to a report by S&P Global Market Intelligence, Indian banks' aggregate cost-to-income ratio climbed to 57.08 per cent from 48.65 per cent in the previous year.
Similarly, the median cost-to-income ratio of lenders in mainland China edged up to 33.13 per cent from 31.64 per cent. Over the past year, banks in both nations have seen their operating efficiency take a hit, largely due to rising operating expenses.
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Banks in mainland China are witnessing pressure on their net interest margins (NIMs) as the People's Bank of China continues to adopt an easing stance to stimulate economic growth.
The central bank is also trying to mitigate a slowdown in the real estate sector, which makes up 25 per cent of the country's GDP, and has already cut its five-year loan prime rate to a historic low of 3.95 per cent in February. The dragon nation's economy grew by nearly 5.3 per cent year over year in the first quarter, surpassing the government's annual growth target of 5 per cent.
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Meanwhile, in India, interest rates have reached their peak levels and are expected to see a declining trend ahead. The RBI has kept its policy rate unchanged for over a year after a series of hikes starting in early 2022. As per the report, this is expected to squeeze the margins of Indian banks.
This comes at a time when Indian banks have made massive investments in expanding their operations, such as opening new branches, acquiring more customers, and enhancing their technology infrastructure to capitalize on the rapid growth of the world's fastest-growing major economy.
