Lending rates moving lower to raise pressure on bank NIMs

Core Viewpoint - Banks' net interest margins (NIMs) are expected to face renewed pressure following recent cuts in the marginal cost of funds-based lending rate (MCLR) by major banks, including State Bank of India (SBI), which may delay margin recovery due to limited scope for deposit rate cuts amid competition from alternative investment options like mutual funds [1][10]. Group 1: MCLR Rate Cuts - SBI has reduced its benchmark MCLR rate by five basis points across all tenures, effective from December 15 [2][4]. - Other banks, including Indian Overseas Bank (IOB), Bank of Baroda, and HDFC Bank, have also implemented similar five basis point cuts in their MCLR rates [10]. - The interest rate on SBI's special Amrit Vrishti 444-day deposit scheme has been cut by 15 basis points to 6.45%, while the rate for the two to less than three years deposit bucket has been reduced from 6.45% to 6.40% [2]. Group 2: Impact on NIMs - The recent MCLR cuts are expected to exert pressure on bank margins, as deposit rates have limited room for further reductions [7][10]. - Interest rates on fresh loans have decreased by 76 basis points since the RBI began its rate cut cycle in February, while rates on outstanding loans have fallen by 58 basis points [8]. - More than 85% of bank loans are priced via an external benchmark or through MCLR, meaning that any cuts directly impact margins, especially if deposit rates remain stable [10]. Group 3: Future Expectations - Bankers anticipate that the improvement in margins expected in the third quarter may be further delayed due to the current rate environment [7][11]. - A fund manager at Nirmal Bang PMS predicts that bank margins may only improve in the first quarter of the next fiscal year, indicating a slowdown in expected margin improvements [11][12]. - Growth during the busy season is expected to come from higher-yielding segments like personal and SME loans, which could help mitigate some of the negative impacts on margins [12].