Banks may face pressure on interest margins as growth momentum in credit, deposits continues

In 2023, retail lending grew by 18 percent year-on-year, with high growth in unsecured lending (loans not backed by collateral).

Banks may face pressure on net interest margins and operating expenses after reporting double-digit growth in advances and deposits, analysts said. Indian banks reported continued strong growth momentum in lending and deposits in the third quarter of FY24, a Moneycontrol analysis of banks’ business updates showed.

HDFC Bank’s advances grew 62.4 percent and its deposits increased 27.7 percent. IndusInd Bank’s advances rose 20 percent and its deposits grew 13 percent.

Among public sector lenders, Central Bank of India reported a 15 percent growth in advances and its deposits grew by 10 percent. Bank of Maharashtra reported a 20 percent rise in advances and 18 percent growth in deposits.

“Overall, the numbers show strong growth, but we may see some pressure on net interest margins (NIMs) and operating expenses due to the festive spends and wages,” said Anand Dama, head of BFSI at Emkay Global Financial Services.

“As we look ahead, tight liquidity conditions would persist amid reasonably strong credit growth,” said Aashay Choksey, vice president & sector head- financial sector ratings at ICRA. “Accordingly, short-term deposit rates would, in all likelihood, harden from the current levels. Consequently, we see greater pressure on NIMs for banks.”

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And Subha Sri Narayanan, Director, CRISIL Ratings Limited said: "Given that raising deposit rates has been an imperative for banks, we believe that this will translate into some correction in the NIMs for the banking sector."

Credit growth

Federal Bank and RBL Bank reported credit growth of 18 percent and 20 percent, respectively. Yes Bank posted credit growth of 11.9 percent and AU Small Finance Bank’s credit growth for the quarter stood at 20 percent.
According to Dama, Bandhan Bank’s 18.6 percent credit growth in the October-December quarter surprised the market.

“Banks like IndusInd Bank and RBL Bank reported numbers which were below market expectations. HDFC Bank and Bandhan Bank showed surprising results," Dama said. This is because in the last few quarters, Bandhan specifically reported muted credit growth.

Narayanan highlighted that on the back of sustained demand, total bank credit is likely to grow at 13-13.5 percent this fiscal and improve a tad to 13.5-14 percent in fiscal 2025 as capex levels pick up.

All banks except the Central Bank of India reported double-digit deposit growth. Federal Bank’s deposit growth for October-December stood at 19 percent. RBL Bank’s deposit growth was 13 percent and Yes Bank’s reported 13.2 percent.

Bandhan Bank reported 19 percent deposit growth and AU SFB’s deposit growth stood at 31 percent.

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Choksey said deposit growth was strong but banks may still need to mobilise incremental deposits by increasing rates.

“Deposit growth has been impressive so far and the momentum should continue, with the same growing by 9-10 percent YoY in Q4 of FY24.

However, despite the relative deceleration in credit growth, banks may still need to mobilise incremental deposits by raising rates,” Choksey said.

High interest rates and elevated inflation did little to slow down demand for credit last year. Since May 2022, the central bank has increased the repo rate by 250 basis points to tame inflation. The key rate was last increased by 25 bps in February last year to 6.5 percent, the highest level in over five years.

In 2023, retail lending grew by 18 percent year-on-year, with high growth in unsecured lending (loans not backed by collateral). Personal loans and credit card spending grew 22 percent and 28 percent, respectively, according to Reserve Bank of India sectoral credit growth data in the sixth edition of the BankBazaar Moneymood Report.

The top four loan categories – housing, auto, personal and credit cards – grew 18 percent to Rs 41.97 lakh crore in 2023. Last year, the RBI raised the risk weights on loan categories including credit cards, personal, consumer durables, and advances to non-banking financiers to curb excessive lending in these riskier segments.