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Informist, Wednesday, Sept. 3, 2025

 

MUMBAI – The latest trends in corporate and personal income indicate that the deposit growth across banks is unlikely to accelerate in the medium term, Kotak Institutional Equities said in a report. The slower growth in loans and the sustained pressure on net interest margins are driving lenders to reduce deposit rates aggressively, the report added. "Despite this, the stronger balance sheets of public sector banks and a clear growth intent across players suggest that a recovery in net interest margins is likely to be gradual at best," the report said. 

 

Despite a 60:35 ratio of market share between public sector and private sector banks, the difference in deposit growth between the two sectors is converging. The report stated that state-owned banks have lost nearly 300 basis points in market shares particularly to private sector banks since the last quarter of 2022-23 (Apr-Mar). However, state-owned banks have a slightly better deposit composition compared to private sector counterparts. 

 

Household deposits contribute the most to deposits at 60%, led by term deposits over savings deposits, the report said. Household deposits dominate 70% of public-sector banks' deposit mix while for private sector banks households held 55%. Metro or urban regions contribute 70% of deposits in private sector banks and it was 70% for state-owned banks.

 

Meanwhile, current account savings account grew 8% on year and term deposits grew 13% annually, the report said. "Savings growth was weak across markets, while current account deposits were strong in metro regions and term deposit growth was strong across regions." the report added. "The only noticeable segment in shift in savings comes from the corporate sector with a greater preference to shift to term deposits." The report also noted that 65% of deposits were in 1-3 year tenors, with individuals having a preference for INR 0.1 million-1.5 million ticket size. Non-individuals preferred higher ticket sizes of over INR 10 million. "The June quarter saw a decline in the 7-8% interest rate bucket, with some signs of a slowdown in non-individual deposit movement," the report said. 

 

Going ahead, Kotak Institutional Equities expect deposit rates to inch toward to peak levels. "There is a 5% jump in 7-8% interest rate bucket, suggesting we are moving closer to headline deposit rates," the report said. The report also said the overall trend on term deposit mobilisation did not reflect any major deviation from previous trends, with the share of individuals in the overall term deposits remaining similar at 50%, sequentially. 

 

Depositors continued their preference for 1-3-year maturity tenor, driven partly by interest rate structure, the report said. Lenders also preferred this tenor as the introduction of external benchmark lending rate-linked loans has weakened the traditional linkage between deposit lenders and loan yields. 

 

Kotak Institutional Equities expects recovery in the net interest margins of banks to remain modest, given the current market conditions. "Our outlook on net interest margin recovery following the steep decline expected in the second and third quarter of FY26 remains more modest than current market expectations. While some rebound is likely, we believe the recovery trajectory will be gradual and constrained by competitive pressures." The broking firm expects the decline in term deposit rates to be more subdued, making it harder for a solid recovery of interest margins over the next two quarters.  End

 

US$1 = INR 88.07

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Gowri Lakshmi

Edited by Deepshikha Bhardwaj

 

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