IDFC First Bank Limited

Effects on banks on reducing rate scenario:

1. When interest rates go down, income from loans also decreases, while the interest paid on deposits might not drop quickly. This can squeeze the spread between what the bank earns and what it pays, lowering NIM.
   1.1 But note that deposits are a portion of their cost. Banks also borrow money to fund their lending activities. Lower interest rates can reduce their funding costs, potentially offsetting some of the decline in interest income.
2. Increased competition for deposits, as customers may be less keen to keep their money in savings accounts. Banks have to compete to offer higher interest rates, reducing margins.
3. Bank treasuries borrow short-term at lower rates and lend long-term at higher rates. Existing short-term loans mature and are repriced at lower rates, the bank earns the higher interest on longer-term loans, temporarily benefiting NIM
4. Low interest rates stimulates capex cycle, thus higher growth rate.

As per me, effect on NIMs will be temporary, i believe that improved credit offtake will offset the impact in margin.
Another point to be to be considered is the bank’s specific lending and funding mix, customer composition, etc. Bank’s with higher % of fixed rate loans will be less impacted, for instance.