Though banks are set to log in robust loan growth, along with healthy asset quality in the June quarter, the key profitability metric net interest margins or NIMs have been under pressure for a few years now, will continue to be under strain as their cheaper Casa deposit growth has been widely lagging loan growth, forcing lenders to mop up costly term deposits.
Brokerages see the overall asset quality, at 1.8%, hits a multi-decadal low in the March quarter in terms of gross NPAs and at about 0.20% in terms of net NPAs, even though there are concerns about the assets quality of their unsecured book.
Analysts expect margin pressure to persist as deposit growth continues to trail credit expansion, forcing banks to rely more on higher-cost term and bulk deposits, which comes at average over 6.5%. The increasing share of lower-yielding corporate loans and greater dependence on certificates of deposit issuances are also expected to weigh on margins, they say.
The latest Reserve Bank data show credit grew at 17.7% as of June 15, compared to deposit growth of 12.2%, pushing the system-wide credit deposit ratio to 83.4 from about 75 a year ago, increasing the need for wholesale funding.
The banks’ fund mobilisation is also impact by the regulatory ban on them from accessing the rupee debt market, barring certificates of deposit (CDs) and infra bonds, while in other markets banks are allowed to do so.
The Reserve Bank heavily regulates how much debt over deposits a bank can raise to protect depositors and control monetary policy. The most important reason for this is to ensure financial stability and also to ensure better monetary policy transmission if banks rely too heavily on market debt funds instead of customer deposits, central bank’s interest rate changes do not immediately affect lending rates.
“We expect NIMs to remain under pressure, declining 5-10 bps sequentially, due to higher growth in low-yield segments, elevated high-cost CD issuances in Q1 and seasonally higher agri slippages,” analysts at JM Financial said. According to the brokerage, banks raised high-cost CDs to bridge the funding gap created by faster credit growth. CD issuances rose 32% year-on-year during the reporting quarter.
Clearing Corporation of India data show banks raised over `1.8 trillion through CDs in June, up from `1.12 trillion in May, while YoY CD yields climbed to nearly 7.7% from about 6.5% earlier, keeping funding costs elevated.
Analysts at Motilal Oswal believe margin relief will be limited in the June quarter. The FCNR-B deposit measures announced in the June monetary policy is likely to aid deposit mobilization, though in the coming months, but the impact on funding costs and therefore on NIMs is expected only from the second quarter. The special scheme to prop the rupee and to shore up the forex reserves is open up to September 30 and is expected to mop up around $50 billion.
JM Financial say private lenders are likely to face higher NIM contraction with Axis Bank and ICICI Bank facing contraction of up to 8 bps on a sequential basis while for HDFC Bank the contraction could be much less, at around 3 bps.
ICICI and Axis had NIMs at 4.32% and 3.62% in Q4FY26, respectively, while HDFC’ came in at 3.38%, a marginal rise from its previous quarter, and Kotak Bank, on the other hand, is expected to have stable margin. The fourth-largest private lender had NIM of 4.67% in Q4, a 14 bps rise from Q3.
