How Rising Interest Rates Are Likely To Impact Net Interest Margins Of Banks

The bank also introduced a specific tenor scheme of “400 days” (Amrit Kalash) at a Rate of Interest of 7.10 per cent from February 15

Outlook Business Team

Updated on: 23 February 2023 5:24 pm

Market analysts are fearing that with rising interest rates demand for loans will get impacted as rate hikes will increase the cost of funds

The banking shares have been facing selling pressure for quite some time now. The measure of 12 banking shares on the National Stock Exchange, Nifty Bank, has dropped 3.5 per cent after the Reserve Bank of India (RBI) hiked its key interest rate, repo rate, for the sixth straight time to pre-pandemic level of 6.5 per cent to control sticky inflation.

The RBI’s Monetary Policy Committee (MPC) earlier this month hiked the repo rate by 25 basis points (bps) to 6.50 per cent.

Market analysts are fearing that with rising interest rates demand for loans will get impacted as rate hikes will increase the cost of funds. On top of that, inflation has once again risen above the RBI's upper end of the tolerance level of 6 per cent in January igniting fears of more rate hikes going ahead.

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Amid all the buzz around rising interest rates, market participants are worried that net interest margins (NIMs), a key metric of bank’s profitability, which touched an all-time high in the December quarter will get impacted adversely owing to the shrinking gap between deposit and lending rates.

After the RBI hiked the repo rate on February 8, State Bank of India, the country’s largest lender, increased the interest rate by 25 basis points on fixed deposits with a tenor of 2 years to less than 3 years to 7 per cent from 6.75 per cent. But its overnight MCLR-based lending rate was hiked by 10 basis points to 7.95 per cent on February 15.

The bank also introduced a specific tenor scheme of “400 days” (Amrit Kalash) at a Rate of Interest of 7.10 per cent from February 15.

Recent SBI's deposit rate also hike shows that lending rate has grown at a slower pace compared to deposit rates as banks are increasing deposit rates at a faster pace because banks are finding it tough to get deposits because of very high competition in deposit markets, analysts said.

That will lead to a crunch in NIMs and that is why banks are not witnessing buying interest despite strong performance in the December quarter where a lot of banks posted record profits and NIMs, analysts added.