The net interest margin (NIM) of private banks has remained under pressure in the third quarter, reflecting the rise in their cost of funds. Most of the private lenders have reported year-on-year (YoY) decline in their net interest margin, impacted by the hike in term deposits and tight liquidity in the banking system.
“The decline in NIM reflects the lagged impact of the increase in term deposit rates over the last one year and that is reflected in the cost of deposits. Overall, the NIM was in line with our expectations,” said Sandeep Batra, executive director, ICICI Bank, in an earnings call on Saturday. “The full year (FY2024) NIM is probably going to be at the same level as FY2023.”
The NIMs of private banks have contracted by 6-36 basis points year-on-year during the third quarter. HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Federal Bank have seen a decline in their NIMs while IndusInd Bank and IDFC Bank have bucked the trend.
Banks’ NIMs have been under pressure over the last few quarters due to a series of hike in deposit rates which has increased their cost of funds. Tight liquidity conditions in the banking system, coupled with high demand for loans, compelled lenders to offer high rates on fixed deposits.
Banks have faced challenges in garnering deposits, leading to a slower growth in deposits, while credit growth has far exceeded the pace of deposit growth. As of December 15, 2023, the banking system’s credit growth (excluding HDFC merger) was 15.8% YoY. Including the HDFC merger impact, the banking system credit grew 20.2%. On the deposit side, the system-level growth was 13.3%.
Banks are unlikely to witness any improvement in NIMs in the next quarter as liquidity is still tight and the credit growth is expected to remain firm. “With the system liquidity continuing to be under pressure, we remain watchful of the persistent gap between credit and deposit growth.
Intense competition between banks to accrue deposits is also likely to partly reflect in higher deposit rates, albeit in select tenure buckets” said Karan Gupta, director and head financial institutions, India Ratings and Research.
Apart from NIMs, private banks have done well on other fronts. They have improved the asset quality which is visible in the quarter-on-quarter decline in gross non-performing assets ratio in the third quarter. On the asset side, private banks witnessed a strong growth as their advances grew 18-20% in the third quarter.