Indian Banks to witness a surge in margins in FY23

NIM is the difference between the interest income earned and the interest paid by a bank to its interest-earning assets. 

The widening of these margins can be attributed to recent interest rate hikes undertaken by the Reserve Bank of India (RBI) in order to tame inflation. 

In addition to that, higher policy rates and favorable funding structures might also contribute to the larger margins, the report said. This, in turn, will help to generate higher returns on assets or ROA. However, the credit costs could either stay constant or may decline in FY23 after increasing significantly during the pandemic. 

“In the case of India, the historic relationship between credit costs and inflation is distorted because of significantly delayed recognition of NPLs and bank restructurings that took place in 2016-18 when inflation was slowing. We expect Indian banks’ asset quality will improve in 2022-23 because of recoveries and write-offs of legacy NPLs,” Moody’s said. 

The surging inflation paired with rate hikes has pushed real (inflation-adjusted) policy rates negative. As a result, this may harm banks due to less number of customers willing to make deposits in these banks.