Falling growth in loans is making banks to look at the possibility of lowering the interest rates on savings bank accounts so as to improve their pre-provision operating profits, investment banking firm Jefferies said.
In an industry note on Indian banking sector about the concerns of investors after the US roadshows, Jefferies said: "Falling loan growth doesn't augur well with NIMs (net interest margin)."
According to the report, with falling loan:deposit ratios, weak loan growth and compressing spreads, banks are looking at the possibility of lowering the savings interest rates.
"Most banks currently offer four per cent, while some of the private sector banks offer a much higher rate," Jefferies said.
According to the report, a 50 basis point cut in savings rate would result in around 8 per cent improvement in the sector's core pre-provision operating profits.
Most investors saw valuations and weak earnings growth for the sector as an immediate headwind. But there was comfort with the longer-term investment thesis driven by government initiatives, the report said.
"Power sector overhang needs a faster asset quality resolution. Investors were concerned about the lack of asset quality resolution which could stall the medium term loan growth for the banks," it added.