Indian banks are confronting a challenging scenario as their net interest income faces a dip, with public sector banks experiencing a faster erosion of savings accounts compared to their private counterparts. The Banking Secretary, Vivek Joshi, recently highlighted this concern, drawing attention to the strain on net interest margins (NIM) for public sector banks. The latest report from S&P Market Intelligence delves into the underlying reasons behind this trend, pointing towards heightened liquidity constraints and escalating funding costs.
The crucial metric of NIM, indicative of bank profitability, is feeling the squeeze as deposit growth lags behind credit growth. Data from the Reserve Bank of India (RBI) for the 2022-2023 period reveals that deposit growth stood at 11 per cent, trailing the robust 15 per cent credit growth.
The S&P Market Intelligence report outlines several challenges faced by Indian banks, including treasury gains, margin contractions, concerns over asset quality in certain institutions, and the repercussions of restrictions on alternate investment funds (AIFs). Analysts anticipate a moderation in both growth and margins, attributing subdued deposit growth to individuals’ growing preference for mutual funds, seeking higher returns.
Despite these concerns, the report indicates that retail lending in India is expected to maintain its upward trajectory, particularly in unsecured loans. Responding to this trend, the Central Bank has raised risk weights on unsecured personal loans. These loans now constitute 35 per cent of bank portfolios in 2023, up from 25 per cent in 2007.
The CASA (Current and Saving Account) ratio, a critical barometer of funds in savings and current accounts, is another focal point for the banking sector. A higher CASA ratio positively impacts net interest margins by indicating lower funding costs. However, data from CareEdge Ratings indicates a contraction in CASA deposits share for both private and public sector banks, highlighting the complex challenges faced by the banking industry.
In navigating this evolving financial landscape of deposit preferences, credit dynamics, and interest rate fluctuations, Indian banks are gearing up to make strategic adjustments, ensuring resilience and success in an ever-changing environment.
