Indian banks are expected to experience a significant squeeze in their net interest margins (NIM) in the coming years as a declining interest rate cycle intensifies competition for deposits. S&P Global forecasts that NIMs could fall by 20 basis points, dropping from 3.2 per cent to 3 per cent, as banks grapple with both increased competition and anticipated policy rate cuts.
According to Deepali Seth-Chhabria, associate director at S&P Global, while the competition for deposits is expected to remain manageable, banks will face mounting pressure as credit growth continues to outpace deposit growth. This imbalance will force banks to work harder to attract deposits, which will put additional strain on their margins. As the cost of deposits rises, banks may also turn to more expensive funding options, such as wholesale borrowings and securitisation, which could further erode profitability.
The report also highlights the potential impact of increased demand for corporate loans. A rise in private sector credit growth could lead to intensified deposit mobilisation, requiring banks to source additional funds at a higher cost. These additional measures, including onshore and offshore borrowings, are expected to put further pressure on banks’ already narrowing margins, exacerbating the challenges they face in maintaining profitability during this rate cycle.
The outlook suggests that banks will need to carefully manage their funding strategies in the coming years to navigate the complex dynamics of a slowing deposit growth environment and a competitive lending landscape.
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