Indian banks face bad loans, weaning margins amid concerns over interest rates

Flag_of_IndiaA recent study by Assocham revealed that rising concern about the interest-rate environment in India has created a difficult situation for banks, which face a crisis involving bad loans and weaning margins between lending and deposit rates.

“The best of the days for the banks in terms of enjoying a huge margin between the fixed deposit and lending rates have disappeared with the spreads narrowing down to 125 to 150 basis points in the last few months from a peak of 875 basis points [between 2009 and 2010],” the study said, according to The Economic Times.

Assocham said that commercial banks have never seen such a disparity since the period between 2000 and 2001.

“The trend does not seem to augur well for the industry as it wants the Reserve Bank of India to cut interest rates, which are eating into growth,” the study said, adding that market conditions would not allow banks to cut deposit rates because of a challenging savings environment, The Economic Times reports. “In a way, it seems to be a vicious circle—high inflation, particularly of food and the wage inflation, dissuades the public from investing in the fixed deposit rates.”

Additionally, the study said that banks have had trouble increasing non-performing assets and reconciling a rising disparity between fixed deposit rates and lending rates.

“We are facing a peculiar difficult position that even though the RBI may be willing now to tweak the policy rates along with the Finance Ministry keeping a leash on the fiscal situation, high deposit rates are an issue,” Assocham President Rajkumar Dhoot said, according to The Economic Times.

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