MUMBAI: Amid slow growth in deposits and rising credit demand, banks are staring at lower margins/profits as they chase depositors offering them higher prices for their money. As a result, analysts see the cost of funds on average rising by as much as 25-30 bps this fiscal, which may top 5.25% system wide.
While credit growth has been averaging 15-16%, deposits accretion has been averaging at 11-12% this fiscal. In FY24, credit grew 19.3% but deposit inched up only 14.7%, forcing banks to offer higher prices for term deposits.
And typically, banks earn more when interest expense (which is what they pay for their funds) is lower. In a normal scenario banks price deposits/liabilities lower than their assets/loans to protect their margins/spreads.But since lending rates are already high, banks are forced to increase deposit rates even as they hold the lending rates.
According to rating agency Crisil, banks profitability is set to moderate due to higher cost of deposits as they continue to re-price already elevated deposit rates.
Deposit costs are expected to increase 25-30 bps this fiscal after having risen 140 bps since the start of the rate tightening cycle in May 2022. As a result, net interest margin is likely to compress 10-20 bps this fiscal to 3-3.1%.
For instance since the beginning of this fiscal, leading banks have increased their deposit rates twice — in June and early July. Before that they had another round of deposit repricing in December 2023.
State-run banks are taking a lead in raising special short-term fixed deposit schemes. The new offers vary from 7.05-7.3% for 360 to 666 days money. While BoB is offering 7.25% for rates for 399 days and 7.15% for 333 days, SBI is giving 7.25% for 444 days and 7.1% for 400 days.
This had the cost of deposits for SBI rising to 5% in the June quarter from 4.55% a year ago and 4.81% in Q4FY24, pulling down its yield on advances to 8.83% in June 2024 from 8.91% in March 2024. Similarly, the second largest lender HDFC Bank saw its cost of funds rising to 4.9% from 4.6% and the yield on yield on assets inching down to 8.4% from 8.7%.
On the other hand, the second largest private sector lender ICICI Bank’s cost of funds shot up to 4.84% this quarter from 4.31% and that of Axis Bank this increased from 5.17% to 5.44%.
On the other hand, state-run banks led by SBI have hiked loan prices, too, this month to protect their margins. On Wednesday, SBI increased its lending rate by 10 bps across tenors, effective August 15 for loans priced on the marginal cost of funds-based lending rate (MCLR). The new rate varies from 8.20% for overnight rate money to 9.10% for three years loans. Earlier this month BoB, Canara Bank, and Uco Bank also hiked their MCLR-based loans by 5 bps for six-month and one-year tenures.
Vying for deposits
Crisil Rating warns banks of bottomline hit as cost of funds seen rising by 25-30 bps this fiscal
State-run banks SBI, BoB leading in attracting deposits offering 7.10 to 7.30% on short-term FDs
Punjab National Bank, Indian Overseas Bank, Punjab & Sindh Bank, Union Bank, Bank of Maharashtra, Canara Bank, Central Bank of India and Indian Bank have also increased FD rates between 7.05 to 7.25%
SBI’s cost of funds rose to 5% YoY in June quarter from 4.55% same quarter a year ago and from 4.81% in Q4FY24
HDFC Bank’ cost of funds rises from 4.6% to 4.9% in June quarter
ICICI Bank’s cost of funds shot up to 4.84% this quarter from 4.31%
Axis Bank’s cost of funds increases from 5.17% to 5.44%