Indian Bank Returns to Decline Amid Lower Treasury Profits and ECL Preparations: Crisil

Crisil Ratings predicts a dip in Indian banks' return on assets due to reduced treasury gains and proactive provisioning for the upcoming expected credit loss framework, set for April 2027. Despite these challenges, net interest margins are forecasted to remain stable, though competition for deposits grows.

Indian banks are facing a potential decline in their return on assets (RoA) this fiscal year, dropping to 1.15-1.2%, compared to about 1.3% last year, a Crisil Ratings report forecasts. The decrease is attributed to lower treasury income and preemptive provisioning in anticipation of the expected credit loss (ECL) framework.

Crisil indicated that while the sector's RoA is above the long-term averages of 0.6% and 0.8%, profitability is being hindered by fewer treasury gains as bond yields stabilize and preparatory provisions by banks ahead of the ECL rule changes in 2027. Despite this, net interest margins are likely to hold at approximately 2.9%.

Subha Sri Narayanan from Crisil noted that deposit rates have decreased 50 basis points while lending rates fell 80 points due to past repo rate cuts, yet deposit costs could rise as banks compete for funding. The report expects this pressure to keep NIMs steady after their peak last fiscal year.

Lower treasury profits are expected to lead to a drop in other income by 0.05-0.10%. Vani Ojasvi from Crisil also pointed out that banking provisions could increase due to proactive preparations for the new regulatory framework.