Rate cuts to impact banks’ key profit indicator: Crisil

The Reserve Bank’s rate cuts will lead to an up to 0.20 per cent slip in return on assets (RoA), a key profitability indicator, for banks in FY26, a domestic rating agency said on Wednesday.

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Crisil Ratings said the RoA will contract by 0.10-0.20 per cent to 1.1-1.2 per cent in FY26 from an over-two-decade high of 1.3 per cent in FY25.

Compression in the net interest margin by a similar level will be the key driver for the slip in RoA, the agency said, explaining that in a falling interest environment, interest rates on loans are expected to reduce faster than those on deposits.

“Of the loan assets, 45 per cent are linked to an external benchmark, primarily repo. Typically, these are repriced rapidly after rate cuts. On the other hand, any reduction in term deposit (TD) rates will apply only to incremental deposits and renewals, resulting in a slower transmission of the reduction to the liability side,” its director Subha Sri Narayanan said.

Apart from NIMs, the agency said, credit costs also have a bearing on the profitability front, and these costs have bottomed out. Additionally, the other income and operating expenses are also seen as flat. Hence, compression in NIM will directly translate to moderation in RoA after accounting for the tax impact.