The pressure on profit margins faced by Indian banks is expected to be felt during the second quarter of the financial year (FY), ending on September 30.
Banks are expected to report up to 12 basis points (bps) contraction in their net interest margin (NIM) in Q2FY25 due to rising cost of funds amid their fight for deposit mobilisation, according to domestic ratings agency CRISIL’s Senior Director, Ajit Velonie.
“Up to 12 bps contraction in NIMs of banks is expected because we have the lag effect of the deposit growth. Private banks could see more compression because their credit-deposit (CD) ratios are higher,” said Velonie during an interaction with Moneycontrol.
Banks have been lagging in garnering deposits, leading to high CD ratios.
Earlier, the Reserve Bank of India (RBI) stated that the CD ratios can be balanced through introduction of innovative products. On August 8, RBI Governor Shaktikanta Das urged banks to offer innovative products and services and effectively use their branch networks to attract household savings as deposits amid increasing appeal of alternative investment avenues to retail customers.
Stress in unsecured business
Lenders are also experiencing stress in the unsecured small and medium enterprises (SME) portfolio. The larger unsecured portfolio is under control and mostly the non-banking institutions are under the pump, according to Velonie. “We're seeing early signs of challenge in unsecured SME loans. As far as unsecured loans in the segment below Rs 50,000 are concerned, banks are trying to steer clear. Mostly non-banking financial companies [NBFC] are active in unsecured loans segment,” he said.
The trend was highlighted in a CareEdge report that was published earlier this month. The report showed that growth in personal loans slowed to 14.4 per cent in July from 31.2 per cent during the same period last year. The decline was attributed to a slowdown in vehicle and unsecured loans, the HDFC-HDFC Bank merger. However, the slump was partially offset by an increase in gold loans, the report stated.
For the shadow banks, Velonie said, the growth in the unsecured business has dropped significantly, as compared to last year. The unsecured personal loans of NBFCs used to be the fastest-growing segment for non-banks at an estimated uptick of up to 45 per cent in the past two years, Velonie said. “After the RBI increased the risk weights on these loans, NBFCs are looking to cap their growth at 25 per cent,” Velonie said.
Funding by private equity (PE) and venture capital (VC), according to Velonie, is also on the wane. “Today when you look at PE and VC funds, they want to see proof of operating profitability. While PEs and VCs are willing to tolerate higher operating expenses and other costs, they have aggressively started looking at the asset quality and the likely credit cost,” he added.
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