Banks Set For 10-20 Bps Compression In NIMs This Fiscal: Report
The banking sector is expected to see a compression of ten to 20 basis points (bps) in net interest margins (NIMs) to 3.0 to 3.1 per cent this fiscal as deposit rate hikes play out, said the rating agency Crisil.
However, with lower credit costs providing an offsetting tailwind on account of continued benign asset quality, overall banking sector profitability should remain steady after touching a decadal high of 1.1 per cent last fiscal.
"We believe NIMs for the banking sector have peaked. Competition for deposits has driven banks to hike rates since October 2022, and they could increase further given that deposit growth continues to lag credit growth," said Krishnan Sitaraman, Senior Director and Chief Ratings Officer, Crisil Ratings.
Sitaraman added that with an estimated 30 to 35 per cent of deposits expected to come up for re-pricing this fiscal, at higher rates, and the shift from current and savings deposits to term deposits continuing, overall deposit costs will rise this fiscal.
He added, "And given that most of the re-pricing on the assets side has already been done, the NIM gains seen last fiscal will partly reverse.”
The expectation of NIM compression is in contrast to fiscal 2023, which is estimated to have seen an expansion of 30 bps to 3.2 per cent from 2.9 per cent in fiscal 2022, said Crisil.
This was due to the differential pace of rate changes between the assets side and the liabilities side for most of fiscal 2023. On the assets side, with 80 per cent of advances being on floating interest rates1, interest income rose sharply as repo rates started rising.
It added that on the liabilities side, deposits are predominantly at a fixed cost, resulting in any higher interest rate being applicable only to the incremental deposits raised and renewals.
Banks chose to raise deposit rates well after lending rates rose even though the pace of deposit growth was slower than credit growth last fiscal, opting instead to utilise their excess liquidity.
Additionally, the Reserve Bank of India has now hit a pause on repo rate hikes for the time being, which would limit the ability of banks to further increase lending rates on loans linked to external benchmarks.
"Of course, the second-order effect of a rise in the cost of funds on MCLR2 would, in turn, have a benefit on the assets side with somewhat higher lending rates. But the extent of that will be relatively less," it stated.
