Indian banks’ profitability at its lowest since 2009

But the worst is yet to come.

Indian banks’ profitability will fall further after government measures to stem the rupee’s record freefall drove up borrowing costs; increased rising bad loans and put a brake on loan growth.

Analysts believe that the banks’ return on equity, which measures profit generated with shareholders’ funds, could fall below 10% in the year to March from last year’s 12.8%.

India’s banking index has lost 19% since July 15 following liquidity tightening measures from the Reserve Bank of India, the central bank, which caused interbank rates to jump to a 17-month high last week.

These moves are increasing the risk of defaults in an economy that expanded last year at the weakest pace in a decade.

Analysts are concerned that with the rise in interest rates, the cash crunch and forex volatility, the evolving operating environment for banks in India is worrying while stressed assets in the banking system are rising.

Interbank funding costs jumped after RBI raised two interest rates and capped cash injections into the banking system to stem the rupee’s 19% slide against the dollar since the end of April.