Macquarie flagged the rising expense of obtaining funds as the central constraint for banking and non-banking lenders in Asia, according to its recent report. The investment bank pointed to slipping liquidity coverage ratios and increasing loan-to-deposit ratios, which together place pressure on deposit growth that is needed both to sustain lending expansion and to protect net interest margins.
The report described the fund-raising environment as difficult and said the cost of funds is likely to remain high. As a result, margins are expected to be flat at best relative to levels seen in the fourth quarter of fiscal year 2026.
Investor preferences have shifted within the Indian financial complex, Macquarie noted. Amid elevated bond yields and the risk of further rate increases by the Reserve Bank of India, investors have shown a tilt toward private sector banks rather than public sector banks or NBFCs. The firm said market participants believe the previous advantage that public sector banks held over private sector peers has ended, a view informed by already low liquidity coverage ratios at public sector banks.
Market participants also expressed concern about the combined effect of rising oil prices, higher fuel costs, and increases in 10-year bond yields. Macquarie reported that investors view this mix - together with the possibility of a repo rate hike by the Reserve Bank of India - as a near-term negative for NBFCs.
Insurers are another area of investor caution. The report said investors were wary of potential disruption from forthcoming commission regulations by the Insurance Regulatory and Development Authority of India. While PB Fintech was seen positively for its growth trajectory and market position, Macquarie recorded investor worries that a cap on distributor commissions could reduce take rates for insurance distribution platforms.
The investment bank also documented concern among foreign institutional investors about currency moves. Rupee depreciation emerged as the most pressing short-term worry for FIIs, and investors were reportedly surprised by limited government or regulatory intervention to stabilize the currency.
Clear summary
Macquarie sees rising funding costs and weakening liquidity metrics as the primary constraints for Asian banks and NBFCs, expects pressure on margins through at least fiscal fourth quarter 2026, reports a shift in investor preference toward private banks, flags headwinds to NBFCs from higher oil prices and yields, and notes investor caution around insurer commission reforms and rupee depreciation.
Key points
- Funding costs are the main constraint for banks and NBFCs as liquidity coverage ratios fall and loan-to-deposit ratios rise - impact: banking and financial sectors.
- Investor preference has moved toward private sector banks over public sector banks and NBFCs amid higher bond yields and potential rate hikes - impact: bank equities and credit markets.
- Regulatory commission changes and currency depreciation are creating uncertainty for insurers and foreign institutional investors - impact: insurance sector and capital flows.
Risks and uncertainties
- Persistently elevated cost of funds could keep margins flat or under pressure - affects banks and NBFC profitability.
- Rising oil and fuel costs together with higher long-term yields and a possible RBI repo rate increase could negatively affect NBFCs in the near term - affects non-bank lenders and credit quality.
- Potential cap on distributor commissions under new insurance regulations may reduce take rates for distribution platforms, creating headwinds for insurers and insurtech intermediaries.