Interest margins of banks at 12-yr high; cost of funds fell 50 bps in FY21

Analysts attribute the margin expansion to the wedge between RBI's repo rate and the lending rate in the market

Banks continue to reap the ga­ins of Reserve Bank of India’s (RBI’s) cuts to the repo rate in recent years. Their interest margins – spread between cost of funds and lending rate – reached a 12-year high of 375 basis points (bps) in financial year 2020-21 (FY21) as the decline in the cost of funds exceeded the softening in lending rates.

The combined interest income of 31 listed banks in the Business Standard sample was down 0.6 per cent in FY21 while their interest expenses – interest paid to depositors – was down 8.5 per cent last fiscal leading to an