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Updated March 22nd, 2024 at 20:42 IST

Which operational factors are causing banks' net interest income to dip?

Despite these concerns, the report indicates that retail lending in India is expected to maintain its upward trajectory, with a surge in unsecured loans.

Reported by: Business Desk
Indian private banks loan growth
Indian private banks loan growth | Image:Freepik
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Banks profits decline: Indian banks find themselves at a crossroads as public sector banks grapple with a faster erosion of savings accounts compared to their private counterparts, leading to a noticeable squeeze in net interest margins (NIM). The Banking Secretary, Vivek Joshi, recently highlighted this problem and emphasised the strain on NIM for public sector banks. Echoing these concerns, the latest S&P Market Intelligence report reveals that major banks, while witnessing income gains in the December 2023 quarter, experienced a decline in NIM due to heightened liquidity constraints and escalating funding costs.

The crucial metric of NIM, indicative of bank profitability, is feeling the pinch as deposit growth trails credit growth. According to data from the Reserve Bank of India (RBI) for the 2022-2023 period, deposit growth stood at 11 per cent, lagging behind the robust 15 per cent credit growth.

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The S&P Market Intelligence report outlines a myriad of challenges faced by Indian banks, including factors such as treasury gains, margin contractions, concerns over asset quality in certain institutions, and the repercussions of restrictions on alternate investment funds (AIFs). Analysts are anticipating a moderation in both growth and margins, attributing subdued deposit growth to a growing preference among individuals for mutual funds, seeking higher returns.

Despite these concerns, the report indicates that retail lending in India is expected to maintain its upward trajectory, with a surge in unsecured loans. Responding to this trend, the Central Bank has raised risk weights on unsecured personal loans. These unsecured loans have grown to constitute 35 per cent of bank portfolios in 2023, up from 25 per cent in 2007.

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Another issue on the radar for the banking sector is the CASA (Current and Saving Account) ratio, a barometer of the proportion of funds in savings and current accounts. A higher CASA ratio indicates lower funding costs, positively impacting net interest margins. Data from CareEdge Ratings indicates a contraction in the CASA deposits share for private sector banks to 39.9 per cent at the end of December 31, 2023, compared to 44.5 per cent on December 31, 2022. For public sector banks, it slipped to 40.5 per cent from 42 per cent. The overall CASA ratio for the Indian banking system declined to 40.1 per cent from 42.8 per cent during the same period.

 

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Published March 3rd, 2024 at 19:33 IST

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