Increased funding costs could impact lenders’ profit margins

Profit margins at Indian banks and non-bank lenders could narrow as they absorb a part of the staggered increases in funding costs to ensure credit demand remains resilient through the cycle of rate hardening.

With the Reserve Bank of India (RBI) raising policy rates to restrain inflation, lenders believe passing on costs fully could hurt credit demand.

“The RBI in the February MPC meeting expectedly raised the repo rate by 25 basis points, while higher inflation print in January CPI poses risk of another hike if inflationary expectations do not ease,” said Anand Dama, analyst with brokerage Emkay Global. “With the threat of El Nino on the rise, food inflation could be a spoil-sport and, thus, add to the risk.”

To be sure, lenders have already raised loan costs for borrowers after the central bank began raising rates early last summer to prevent inflation from accelerating.