Banks' Return on Assets Expected to Decline by 10-15 Basis Points to 1.15-1.20% in FY27: Crisil Report

Indian Banks to See Reduction in Return on Assets Due to Rising Bond Yields and New Credit Loss Framework

Indian banks are likely to experience a decrease of 10-15 basis points in their return on assets (RoA) to 1.15-1.2 percent in FY27, according to a report by credit ratings agency Crisil. This reduction is attributed to decreased treasury income resulting from rising bond yields and pre-emptive provisioning ahead of the transition to the expected credit loss (ECL) framework, which takes effect in April 2027.

Despite this decrease, the RoA for banks will remain above the 20-year average of 0.8 percent and the 10-year average of 0.6 percent. The benchmark 10-year bond yield has increased from 6.67 percent in late February to trade above the psychological 7 percent mark, a 40 bps hike. Notably, the 10-year G-sec yield crossed the 7 percent mark for the first time since July 2024.

Treasury Income and Provisions

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Total other income is expected to soften by 5-10 bps in this fiscal year, primarily due to normalization in treasury income. In contrast, the previous year saw treasury income benefit from a sharp fall in bond yields, resulting in gains on the investment portfolio. Moreover, the new ECL norms, which are expected to come into force from April 1, 2027, may have an impact on provisions. However, banks have been proactive in setting aside funds ahead of the new framework, which is likely to result in a benign increase of 5-10 bps in provisions.

Net Interest Margin

The net interest margin (NIM) for banks is expected to remain stable in FY27, despite potential corrections from last fiscal's exit NIM. The NIM is expected to correct from the peak of more than 3 percent in the fourth quarter of last fiscal, while remaining in line with the full-year level of last fiscal. The banking sector's NIM is expected to hold steady at about 2.9 percent this fiscal, after declining 20 bps last fiscal.

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Credit Growth and Deposit Costs

Credit growth has continued to outpace deposit growth in recent months, resulting in intense competition for deposits. This, coupled with an increasing reliance on pricier funding sources such as bulk deposits, is likely to push deposit costs up. The cost of liabilities has likely bottomed out, according to Crisil Ratings.