Rupee swings, tight liquidity may slightly hit bank margins, but no major worry: Fitch

Rupee volatility and tight liquidity could shave 20-30 basis points off bank margins if current conditions persist, according to Fitch Ratings.

Explaining the risk, Prakash Pandey, Associate Director – Financial Institutions at Fitch Ratings, said, “If that's how it persists for another year, we see the margins going down by roughly around 20–30 basis points.”

The pressure comes from tighter funding conditions, with Pandey stating that “we've seen some tightening in the funding conditions in the system, despite RBI efforts at increasing liquidity.”

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Even so, the decline is expected to be limited. He said “it's by no means going to be a structural decline,” with margins likely to hold “close to 3%… probably a 2.8–2.9% mark.”

Support from the RBI remains a key buffer, as the system “still leaves meaningful flexibility… to keep injecting liquidity.”

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Risks are building on the asset quality side, especially for smaller businesses. Pandey said “cost side pressures would lead to moderate impact on the SME credit profile,” though banks are cushioned with “significant buffers… provisioning buffers… close to the 75% mark.”

Other risks remain limited, with “the contribution from their FX revenues… not particularly significant,” and only a moderate impact expected from bond yields.

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