InvestorQ : Is it true that the RBI financial stability report has painted a good picture of profitability of banks?
Riya Dwivedi made post

Is it true that the RBI financial stability report has painted a good picture of profitability of banks?

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shrinidhi Rajan answered.
5 months ago
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Actually, the FSR has pointed out that there is good news on the return on capital of banks and a fall in the cost of funds due to falling interest rates. However, while deposits grew 11% with focus on CASA, credit growth was just 5.4% leading to multi-year low credit deposit ratios. However, the good news was that the ROE of banks expanded from 4% to 7.7% on yoy basis while the return on assets or ROA expanded from 0.4% to 0.7% overall.

The sharp fall in the interest rates and better transmission ensured that the cost of funds of the banks fell from 5.6% to 4.7% on yoy basis. However, due to falling interest yields during this period, the yield on assets fell from 8.3% to 7.6%. Consequently, overall impact on net interest margins or NIM was a just 20 bps from 3.1% to 3.3%, but positive nevertheless. The big story for banks is that the efficiency of capital use has improved drastically in last 1 year.

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