MC Budget Panel | Banks to continue to face pressure on NIMs, experts say

NIM is the money a bank makes on interest

After recording strong growth in the past few quarters, Indian banks may face some pressure on the net interest margin (NIM), industry experts said. NIM is the money a bank makes on interest on loans vis-a-vis to the money paid as interest on deposits.

Speaking on Moneycontrol’s pre-budget panel discussion held on January 30, experts said the growth in bank deposits and advances has not been aligned, which may put pressure on the margins of banks.

“The deposits have grown in lower teens and advances have grown in higher teens. There is pressure on NIMs probably because the growth in advances has been higher than the growth in deposits,” said Vinod A N, GM and Head, Treasury, South Indian Bank. He said banks would see some pressure on the NIM.

Earlier in January, rating agency ICRA had said that pressure on banks’ NIMs is expected to continue in financial year (FY) 2024-25, driven by rising deposit costs in FY24 and thereafter by a likely cut in repo rates. In the latest reporting quarter, most banks’ NIM saw an average contraction of 4-35 basis points. Some of the banks that have seen a decline include ICICI Bank, Kotak Mahindra Bank, Union Bank of India, and Federal Bank.

“Cyber security issues will always be there and one has to fight with that. And what is more required is how we are robust in our cyber security. As we grow more digital, we should be fully prepared to fight against these things. There should be a good security framework so that we can (fight),” said S Krishnan, MD & CEO, of Tamilnad Mercantile Bank.

Sector performance

Experts in the discussion also highlighted that the banking sector is performing well and is poised for further growth.

The majority of the banks reported double-digit growth in net profits and low non-performing asset numbers in the October-December quarter of the financial year 2024-25. For example, the country’s largest private sector bank, HDFC Bank, reported a 33 percent jump in net profit to Rs 16,372 crore. Among public sector lenders, Union Bank of India reported a jump of 60 percent in its net profit to Rs 3,590 crore.

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NPA numbers too showed the same trend. Axis Bank’s gross non-performing assets (GNPA) stood at 1.58 percent, down from 2.38 percent in the year-ago quarter. The net NPA of the lender remained flat at 0.36 percent. Punjab National Bank’s GNPA stood at 6.24 percent, down from 9.76 percent recorded in the same quarter last year. On the other hand, net NPA for the quarter stood at 0.96 percent, improving from 3.30 percent on a year-on-year basis.

Here, Krishnan highlighted that the banking sector would be doing extremely well with the growing economy. “If you look, the economy is growing and now the banking sector is also growing. If I look into the balance sheets of the banks, they have been cleaned up. If you look into whether it is the public or private sector space, both the banks are strong enough,” Krishnan said in the panel discussion.