The Reserve Bank of India (RBI) has taken significant steps to increase banks' participation in capital markets, despite current exposure remaining limited. The top 12 banks in India have a combined capital market exposure of ₹2.5 lakh crore, representing just 1.8% of their total loan book of ₹138.5 lakh crore.

Leading Banks in Capital Market Exposure

Among major banks, Axis Bank leads the pack with a 4.03% exposure to capital markets, followed closely by ICICI Bank at 3.7% and Kotak Mahindra Bank at 2.9%. These figures highlight the conservative approach of Indian banks towards capital market lending, even as retail participation in the markets continues to grow.

RBI's New Lending Limits

In a move to boost capital market activity, the RBI has implemented several key changes:

1. Increased the loan limit against shares from ₹20 lakh to ₹1 crore
2. Raised IPO financing limits from ₹10 lakh to ₹25 lakh per person
3. Removed the regulatory ceiling on lending against listed debt securities entirely

These measures are expected to provide a significant boost to capital market participation and potentially increase banks' exposure to this sector.

Positive Market Response

The banking sector responded positively to these regulatory changes, with notable gains in key banking stocks:

The Nifty Bank index reflected this optimism, gaining 712 points to close at 55,348.

Retail Investor Participation

The RBI's move comes at a time of growing retail investor participation in the capital markets. Currently, individual investors are channeling approximately ₹26,400 crore monthly into mutual fund schemes through Systematic Investment Plans (SIPs). This steady inflow underscores the increasing importance of retail investors in India's capital markets.

Outlook

While the RBI's new measures are designed to encourage greater bank participation in capital markets, it remains to be seen how quickly and to what extent banks will increase their exposure. The current 1.8% exposure level suggests there is significant room for growth, but banks may continue to approach this sector cautiously, balancing potential returns against risk management considerations.

As the effects of these regulatory changes unfold, market observers will be keenly watching for shifts in banks' lending patterns and any corresponding impact on capital market dynamics. The coming months may provide valuable insights into the effectiveness of the RBI's strategy in fostering a more robust and diverse financial ecosystem in India.

The Indian banking sector is poised for a turnaround in net interest margins (NIMs) after hitting a low point in the second quarter, according to industry analysts. The benefits of the recent rate cut cycle are expected to manifest from the third quarter onwards, potentially boosting the profitability of banks across the country.

Rate Cut Transmission and Its Impact

Banks have been proactive in passing on the benefits of rate cuts to borrowers:

• A full 100 basis points rate cut has been extended to homebuyers and small businesses
• Approximately 30 basis points reduction has been applied to other loan categories
• Banks are beginning to reap the advantages of lower deposit costs

Q2 NIM Decline

The sector witnessed a significant drop in NIMs during the second quarter:

• Overall sector NIM fell by 25 basis points year-on-year, reaching 2.89%
• This marks a decline from 3.15% recorded in the same quarter of the previous year

Factors Contributing to NIM Pressure

Several factors have contributed to the squeeze on NIMs:

1. Subdued credit growth
2. Declining Current Account Savings Account (CASA) deposits
3. Faster repricing of loans compared to deposits

Bank-wise NIM Performance

Private Sector Banks

Public Sector Banks

Outlook for H1 FY2024

Analysts anticipate that NIMs will continue to face pressure through the first half of the fiscal year. This ongoing strain is primarily attributed to the continued repricing of loans in response to the changing interest rate environment.

Future Prospects

Despite the current challenges, the outlook for the Indian banking sector appears optimistic. The full impact of the rate cut cycle is expected to materialize in the coming quarters, potentially leading to a recovery in NIMs. This anticipated improvement could contribute to enhanced profitability for banks, benefiting both the institutions and their stakeholders.

As the sector navigates through this transitional period, investors and industry observers will be keenly watching for signs of the projected NIM recovery and its implications for the overall financial landscape in India.