Indian Overseas Bank Chief Warns of NII Impact in Upcoming Rate-Cut Cycle

Indian Overseas Bank Chief Warns of NII Impact in Upcoming Rate-Cut Cycle

Ajay Srivastav, Managing Director and CEO of Indian Overseas Bank (IOB), has cautioned that banks' net interest income (NII) will likely suffer when the Reserve Bank of India (RBI) begins to cut key policy rates. Banks with significant exposure to retail and MSME loans may experience pressure on their marginal cost of funds-based lending rates as policy rate cuts come into effect.

Srivastav explained that banks were unable to fully capitalize on higher rates when the RBI raised them, leaving them in a challenging position as the rate cycle reverses. Loan products linked to the external benchmark lending rate or repo rate are expected to shrink as a portion of banks’ overall loan books.

To counteract this, banks may need to reduce deposit rates, potentially discouraging customers from saving, particularly for institutions with less than 80% retail deposits and current and savings account (CASA) deposits. IOB, however, remains secure, with 93-94% of its deposits in retail and CASA.

IOB is also preparing for the RBI’s draft guidelines on Basel III liquidity coverage ratio (LCR) norms, which are expected to be implemented next year. With an LCR of 136%, IOB is well above the required 100% threshold. The bank is focusing on sustainable products such as salary accounts, CASA, and retail term deposits, which are favorable under the new regulations.

Additionally, IOB plans to expand its network of branches and ATMs, streamline its MSME loan processing, and further collaborate with fintech partners to enhance its services.