The Reserve Bank of India (RBI) has announced a reduction of 0.25 per cent in the repo rate after a long interval of about 5 years. Typically, banks benefit from cutting rape rates as the decrease in interest rates increases the demand for loan and reduces funding costs. Also, treasury benefits are also provided in bond yields. In such a situation, the question arises whether now is the right time to invest in banking and financial sector?
Interest rate cuts are still initial stages. This time the special thing is that there is now a large part of the retail loan in the loan book of banks, which is directly connected to the repo rate. In such a situation, changes in interest rates will immediately affect the rates of these loans, which is a relief news for the customers.
In addition, the relief in income tax of the middle class in the Union Budget may increase their income, which may further increase the demand for retail loans in the coming days. This can accelerate demand in the economy and create a strong multiplier effect.
Challenges for banks
However, there are some important concerns here. Credit-to-Deposit (CD) Ratio Philhal is around 80%, while many private banks are running over 90%. This may have to raise expensive deposits for their growth. The net interest margin has seen a steady decline. The stake of unseeded loan is decreasing, causing a decline in the interest rate of these loans. Banks are now finding it difficult to raise cheap deposits, which is increasing funding cost.
According to a report by Moneycontrol Pro, the trend of HDFC Bank may be different among all this. HDFC Bank has a borrowing stake in the total liabilities, which is higher than the rest of its rivals. In addition, HDFC Bank can now replace the expensive borrowings taken from the market with cheap deposits, which will improve its margin.
The report said that we also like Kotak Mahindra Bank as it was performing relatively weak in recent years. Apart from this, Federal Bank and Karur Vaishya Bank have also included in their favorite list.
NBFCs will benefit?
Compared to banks, non-banking finance companies can get more profit from cutting interest rates (NBFCs). NBFCs whose lending portfolio is based on fixed rates may seem to improve their margin. However, companies that have a higher share in unseeded loans will not be able to make profit due to rising credit costs.
Bajaj Finance is the country’s largest unsecured loan company. The Moneycontrol Pro report said that this situation will be challenging for Bajaj Finance as it is now moving towards a low -interest home loan -like secured loan, which will put pressure on its margin. In the NBFCS segment, the Moneycontrol Pro is a favorite Shriram Finance. In housing finance companies, it is liked by Home First, Aadhar and Repco.
– Moneycontrol Research
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