Pressure On Interest Margins Likely As Credit & Deposit Growth Persists For Banks
Analysts anticipate potential strain on banks' net interest margins and operating costs following robust double-digit growth in advances and deposits, observed in the third quarter of FY24 by Indian banks, according to a analysis from a media house.
HDFC Bank witnessed a striking 62.4 per cent growth in advances, accompanied by a 27.7 per cent surge in deposits. IndusInd Bank saw a 20 per cent rise in advances and a 13 per cent increase in deposits.
Public sector banks also displayed positive growth: Central Bank of India reported a 15 per cent uptick in advances and a 10 per cent growth in deposits, while Bank of Maharashtra observed a 20 per cent increase in advances and an 18 per cent rise in deposits.
Anand Dama from Emkay Global Financial Services pointed out potential pressures on net interest margins and operational expenses due to festive spending and increased wages, despite the strong growth figures.
ICRA's Aashay Choksey emphasised that tight liquidity conditions are expected to persist amidst robust credit growth, likely leading to an increase in short-term deposit rates and consequent pressure on banks' net interest margins.
CRISIL Ratings' Subha Sri Narayanan highlighted the necessity for banks to raise deposit rates, potentially causing corrections in the Net Interest Margins (NIMs) for the banking sector.
Regarding credit growth, Federal Bank and RBL Bank recorded credit growth rates of 18 per cent and 20 per cent, respectively, while Yes Bank and AU Small Finance Bank showed credit growth rates of 11.9 per cent and 20 per cent, respectively.
Dama noted Bandhan Bank's surprising 18.6 per cent credit growth, which surpassed market expectations, especially considering their recent quarters' muted credit growth.
Narayanan predicted sustained demand leading to total bank credit growth of 13-13.5 per cent for the fiscal year, expecting a slight uptick to 13.5-14 per cent in fiscal 2025 as capital expenditure levels rise.
Deposit growth across banks except Central Bank of India remained in double digits. Banks like Federal Bank, RBL Bank, Yes Bank, Bandhan Bank and AU Small Finance Bank reported varying percentages of deposit growth, ranging from 13 per cent to 31 per cent.
Choksey underscored the need for banks to potentially raise rates to mobilise additional deposits despite strong deposit growth trends.
Despite high interest rates and persistent inflation, the demand for credit remained robust. The RBI reported an 18 per cent year-on-year growth in retail lending in 2023, particularly in unsecured lending, including personal loans and credit card spending, showing significant upticks.
The RBI's measures to increase risk weights on certain loan categories aimed to moderate excessive lending in these segments and ensure a balanced lending environment.
