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Informist, Tuesday, Nov. 12, 2024

 

By Kshipra Petkar

 

MUMBAI – The second quarter of the financial year 2024-25 (Apr-Mar) has been a telling one for Indian banks. Even before the results for Jul-Sept started trickling in, several bankers had noted how it was increasingly becoming difficult to raise deposits, which had been growing at a weaker pace than loans. Deposit growth had been worrying enough for both the government and the Reserve Bank of India to call upon the banking sector to find ways to mobilise retail deposits.

 

In what will be a source of some relief to bankers, the wedge between deposit and credit growth narrowed in Jul-Sept and has continued to do so beyond that quarter, thanks to weaker loan growth and improving deposit growth. According to the latest data from the RBI, banks’ loans as of Oct. 18 were up 11.5% year-on-year, while deposits were 11.7% higher--the first time since April 2022 that loans had increased at a slower rate than deposits.

 

While loan and deposit growth rates may be converging, the costs borne by banks showed up in their Jul-Sept results, which showed their margins coming under pressure as the cost of deposits rose further. "We believe the moderation in credit growth reflects the impact of tighter macroprudential policies and higher interest rates, while the decision by banks to raise fixed deposit rates over the past few quarters to bridge the credit-deposit gap is helping support higher deposits,” Nomura economists said in a note last month.

 

For public-sector banks, net interest margins were down 5 basis points on average from Apr-Jun and 22 bps from a year ago, as per data collated by Informist. The numbers were only slightly better for private banks, with net interest margins down 4 bps on average from the previous quarter and 17 bps from last year. As per the data collated by Informist, within public-sector banks, Canara Bank’s margin fell the least, by 2 bps on quarter, to 2.88%. The net interest margins of Punjab National Bank and Union Bank fell the most, 15 bps on quarter.

 

In the case of private-sector banks, the net interest margins of Karur Vysya Bank and South Indian Bank fell by 2 bps each, the lowest in the category. HDFC Bank and YES Bank kept their margins unchanged on quarter. The margin of RBL Bank fell 63 bps on quarter to 5.04%, the highest fall among private banks.

 

In terms of cost of deposits, Canara Bank was the only public-sector bank to see no change in Jul-Sept compared to Apr-Jun, although it shelled out 35 bps more than it did in the same period last year. Other government-owned banks saw their cost of deposits rise by 3-20 bps sequentially and as much as 46 bps on year, with Indian Overseas Bank seeing the higher increase over both time frames. For private banks, the average rise was lower quarter-on-quarter but higher when compared to the second quarter of FY24.

 

"With repo rates unchanged for more than a year, lending rates have remained broadly stable, while funding costs have been trending upwards due to ongoing re-pricing and an increase in select tenors by certain banks as they compete for deposits to support credit growth," CareEdge Ratings said in a note last week, adding that net interest margins could come under further pressure from the RBI cutting the repo rate in the second half of FY25.

 

"Banks with a higher proportion of fixed loan books are expected to fare better and report NIM expansion or stable NIMs in FY26," analysts from Motilal Oswal Financial Services said. This was borne out by comments from State Bank of India Chairman C.S. Setty, who said Friday that the country’s largest bank does not expect a hit to its margins from the central bank lowering policy rates because more than 40% of its loan book is linked to the marginal cost of funds. "And even other benchmarked, T-bill-linked loans are very short-term loans, which we have the capability to re-adjust the pricing there," Setty said.

 

Profitability came under pressure not only from falling margins, but also from a rise in provisions due to increasing stress in the retail and microfinance portfolios, which was another theme that played out during the quarter. While microfinance is a key segment for several banks, they looked to cut down their exposure to the segment in Jul-Sept. The impact was particularly telling for some of the smaller banks.

Take IDFC FIRST Bank, for instance, which made a "prudent provisioning buffer" of INR 3.15 billion for its microfinance business even as the share of the portfolio in the overall loan book was reduced to 5.6% as at the end of September, from 6.3% as of Jun. 30. Meanwhile, IndusInd Bank’s gross slippage from microfinance in Jul-Sept was INR 3.98 billion, more than three times the amount from the corporate loan book.

 

The RBI has been tightening the screws on lenders’ microfinance businesses. On Oct. 9, Governor Shaktikanta Das warned that the central bank was keeping a close watch on the sector, where some entities were chasing "excessive returns" by charging "usurious" interest rates. A few days later, the RBI barred four non-banking finance companies and two microfinance firms from giving fresh loans. Reports since have said the central bank has asked lenders to stop "netting off" loans.

 

Retail loan growth, meanwhile, has declined over the past one year thanks to the RBI’s decision to increase risk weights for certain categories. However, slippages continue; Bank of Baroda saw fresh slippages to the tune of INR 8.17 billion in Jul-Sept from the retail book, up from INR 4.83 billion a year ago.

 

"We remain cautious about Indian unsecured retail given rising delinquencies and growing risks in that segment; the urban middle and lower-middle class consumer is stretched with high inflation and high interest costs, and economic activity in India has been slower than anticipated," analysts from CreditSights, a division of Fitch Group, said in a note last month.  End

 

With inputs from Siddharth Upasani

Edited by Rajeev Pai

 

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