Indian banks are set for a profit boost on Rs 2,000 notes withdrawal


MUMBAI: A key metric for profitability Indian bankscredit margins, should see a boost as the country’s decision to withdraw its top-denomination notes strengthens bank deposits.
According to a statement from the Axis Mutual Fund, the Reserve Bank of India’s move to withdraw the 2,000-rupee notes will boost deposits with banks and reduce their funding costs. The move could boost deposits by up to Rs 2 trillion by the end of September when the banknotes exchange deadline, the wealth manager said.
The bank’s net interest margin, the difference between the bank’s lending rates and the amount it pays for deposits, will narrow in the year ended March 31 as demand for credit outstrips deposit growth, Fitch Ratings warned earlier this year. According to this, the banks had deposits of 18.4 trillion rupees in May RBI.
But as the rush to deposit the high-value notes ahead of the deadline increases, banks’ margins could widen, said Madan Sabnavis, chief economist at state-owned Bank of Baroda.
That’s because the inflow of debt securities would lead to an increase in low-cost deposits, known as current accounts and savings accounts, which would lower the overall cost of funds for lenders and improve their margins, according to Virat Diwanji, president and head of the group. Consumer Banking at Kotak Mahindra Bank
However, the gains may be short-lived as people start withdrawing the funds. Still, short-term deposit rates could fall for now, which would mitigate the impact of rising deposit rates on margins, CareEdge Ratings Ltd said in a statement.

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