Saturday 22 / February / 2025
New Delhi: Indian banks are facing renewed pressure on their net interest margins (NIMs) as interest rates are expected to decline following the Reserve Bank of India's (RBI) decision to cut its benchmark rate for the first time in nearly five years.
According to S&P Capital IQ, Net Interest Margins (NIM) at the six largest private and state-owned banks have been under stress as deposit rates caught up with lending rates over the past few quarters. However, strong credit demand has helped these banks maintain growth.
In the October-December quarter of FY24, five out of six major banks saw loan growth of over 12 per cent, boosting their net income year over year, according to S&P Global Market Intelligence data.
On January 27, the RBI introduced liquidity measures to support the banking system and later followed up with a 25-basis-point cut in its benchmark repo rate to 6.25 per cent on February 7.
Analysts at Nomura expect further rate cuts in 2025, with the next one likely in April. They anticipate a terminal rate of 5.50 per cent by the end of 2025.
With deposit rates remaining high due to tight liquidity conditions, borrowers are expected to push for lower lending rates, putting pressure on banks' margins.
The State Bank of India (SBI), the country's largest lender, saw its NIM shrink by 17 basis points year over year to 2.86 per cent in Q3 FY24.
However, SBI's credit growth remained strong at 14 per cent year over year, primarily driven by retail, agriculture, and MSME loans, as well as improvements in corporate lending, according to Emkay Global Financial Services.
While Indian banks have expanded their loan books, deposit growth has been slower. More customers are shifting from low-interest savings accounts to higher-yielding fixed deposits, increasing banks' funding costs.
SBI Chairperson Challa Sreenivasulu Setty called this shift a "behavioural change" that has added pressure on margins. SBI's deposit growth in Q3 FY24 was 10 per cent, while the share of low-cost current and savings accounts (CASA) in total deposits fell to 37.6 per cent from 38.4 per cent in the previous quarter.
Goldman Sachs noted that banks are facing intense competition for deposits, limiting their ability to expand loan yields.
Other state-owned banks also saw margin declines, with Bank of Baroda's NIM falling by 20 basis points to 2.93 per cent and Punjab National Bank's margin dropping by 19 basis points to 2.67 per cent.
