Moderating Casa Deposits, Higher Cost Of Funds Impacting NIM Of Banks

The net interest margins (NIM) of scheduled commercial banks (SCBs) have declined by 16 basis points (bps) in the quarter ending 31 December 2023 (Q3 FY24) on a year-on-year (YoY) basis standing at 3.14 per cent. The NIM of private sector banks (PVBs) have been impacted the most, declining by 32 bps on a YoY basis whereas the NIM of public sector banks has declined by 12 basis points on a YoY basis.

“The NIM for SCBs remained flat sequentially and stood at 3.14 per cent, as the rising cost of deposits impacted the NIM margin,” said the CareEdge report.

The report also highlighted that the deposits are trailing the credit demand due to sluggish growth in current account and savings account (Casa) deposits. However, the demand for credit is partially offset by the time deposits.

“Deposit growth continued to lag credit growth with sluggish current account and saving account (Casa) growth, which was partially offset by the growth in Time Deposits. Casa ratio continued to decline and reached 38.6 per cent of total deposits,” said the CareEdge report.

According to the Reserve Bank of India (RBI) data, the Casa deposit to the total deposit ratio has declined from 43.6 per cent in the financial year 2021-22 (FY22) to 41.5 per cent in FY23.

The NSE filing reveals that the Casa to total deposit ratio of State Bank of India (SBI) has declined from 44.63 per cent in Q2 FY24 to 41.88 per cent in Q3 FY24. Similarly, the Casa to total deposit ratio of the Central Bank of India has declined to 49 per cent (40 bps) in Q3 FY24 from 49.40 per cent in Q2 FY24. The post-merger impact of HDFC Bank and HDFC Limited can be seen in the Casa to total deposit ratio also where the ratio has increased a tad by 10 bps in Q3 FY24. The Casa to total deposit of Federal Bank has declined to 30.63 per cent in Q3 FY24 from 31.17 per cent in Q2 FY24. Similarly, the Casa to total deposit ratio of Bandhan Bank declined 2 per cent in Q3 FY24 as compared to the previous quarter.

The trends and progress of banking in India report by RBI highlights that the Casa to total deposits ratio used to be low in the past decade but this ratio steadily increased post-demonetisation reaching its all-time high in the year 2022. The report by RBI highlighted that the total deposit in the year 2016 was Rs 1,00,927 crore of which Casa deposits were Rs 34,504 crore, which is 34.19 per cent of total deposits. In the year 2022, the total deposits reached Rs 1,71,806 crore and the Casa deposits reached Rs 75,037 crore which is 43.68 per cent of total deposits. But, there is a steep decline of Casa to total deposits by 212 bps in just one year to 41.56 per cent in 2023, suggests RBI data.

“As Deposit Rates are growing, we can see a shift within deposit ratio, wherein term deposits have seen a stronger growth compared to Casa, this has been one of the major concerns impacting the cost of funds subsequently impacting NIMs,” added CareEdge report.

RBI has paused the rate hike cycle and kept the repo rate constant at 6.5 per cent since February 2022.

“Incremental credit expansion has been robust so far at Rs 15.5 trillion (for FY24 till 1 December 2023), against Rs 18.2 trillion in FY2023. However, as we look beyond this year, credit growth is likely to come off as tight liquidity conditions would eventually weigh down on growth. Besides this, factors including weaker credit demand in the agriculture segment, subdued export demand as well as the recent increase in risk-weights to the unsecured consumer lending and the non-banking financial companies (NBFC) segments would also collectively temper credit traction,” said Aashay Choksey, Vice President, Icra.

Amid the sustained liquidity pressure in the banking system, short-term money market rates, starting from overnight rates to commercial papers and certificates of deposit, have remained elevated for a long time. The tight banking system liquidity was aggravated in December 2023 due to an advance tax payout. On a net basis, the RBI has injected liquidity averaging Rs 1.8 trillion between 16 December 2023 and 14 January 2024.

“Sustained tightness in the banking system liquidity could prove to be onerous for borrowers and will worsen in case if government spending does not accelerate in a meaningful way. Therefore, the infusion of durable liquidity is becoming necessary and idealistically, the monetary policy stance should change to ‘neutral’ from ‘withdrawal of accommodation’ to maintain consistency of stance and action,” said Soumyajit Niyogi, Director, Core Analytical Group, India Ratings (Ind-Ra).

Ind-Ra opines that in the case government spending does not pick up, the RBI will necessarily have to step in more durably to manage banking liquidity.

The RBI conducted five variable rate repo (VRR) auctions of two to seven days maturity and a main operation (13 days) amounting to Rs 1.75 trillion between 16 December 2023 and 14 January 2024. The banking system liquidity worsened in January 2024 with the net deficit staying above Rs 1.6 trillion on average and a high of Rs 3.34 trillion. The condition remained in deficit in December 2023, when the net deficit crossed Rs 2.5 trillion in the last week, owing to back-to-back advance tax payments and monthly GST payments.

“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.