Rising Interest Rates: Banking Sector Faces New Adversary: ​​Fundamental Risks | Techy Kings

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As interest rates rise across the board, the Indian banking industry is looking at a new problem on their books: basis risk.

This refers to the potential risk when the hedge is not perfect, leading to losses.

In this scenario, experts see that the increase in lending rates will not be able to keep up with the increase in deposit rates, causing the net interest margin to suffer.

Therefore, delivery on deposit rates is slower than loan rates. This will force lenders to repay their liabilities more quickly in the coming months.

The weighted average domestic term deposit rate as of August has risen only 26 basis points this year, compared to a 190 basis point rise in the repo rate so far, according to data available with the Reserve Bank of India.

The weighted average lending rate, however, has increased by 41 basis points for all scheduled commercial banks, while the annual marginal cost-based lending rate has increased by 50 basis points.

Non-food credit reported 16.9% year-on-year growth in the fortnight ended September 23, according to RBI data. In comparison, total deposits increased 9.2% year-on-year.

As credit demand continues to remain buoyant despite rising lending rates, banks are forced to raise interest rates for their regular depositors.

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