Banks may feel heat as cos' margins under pressure: Nomura

The margins of corporates are under pressure as they are unable to pass on the rise in input cost due to poor demand, which will have a negative impact on banks, brokerage Nomura India said today.

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"With weak demand constraining pricing power and input costs rising due to currency weakness, margins are likely to remain under pressure," its economists said in a note.

The report also warned that worsening margins of corporates will put pressure on banks as they may not be able to service their credit obligations.

"Apart from hurting profitability, the trend will also lead to deterioration of credit quality for banks and hence worsen the employment and investment prospects," the report warned.

The report noted that going by the manufacturing PMI (purchasing managers index), which entered a negative zone last month, the margin ratio has slipped to 0.88 percent in July compared to 0.95 percent in June.

The note said manufacturers are most likely absorbing a higher share of the input costs in their margins due to the weak demand and added that this trend is likely to continue.

It, however, also noted that the depreciating rupee is not the only reason for the rise in input costs, saying the high interest rates are also a big factor and more so after the liquidity squeezing measures introduced by the RBI last month.

Both these factors will ultimately have a bearing on GDP growth, Nomura said, reiterating that it has cut its FY14 growth estimate to 5 percent from the earlier 5.6 percent.