Banking News

Higher costs for new deposits may hit bank margins

Higher costs associated with deposit mobilisation could potentially dent net interest margins (NIM) at lenders, although strong growth in advances to retail borrowers should minimise the contraction in core profits as these unsecured loans typically fetch higher returns for financiers.

Term deposit rates have gone up by about 200 basis points in the last few months as banks have had to catch up with the stronger credit growth. One basis point is 0.01 percentage point.

However, rates are still lower than the 250 basis points increase in the benchmark repo rate by the Reserve Bank of India (RBI) in the last one year.

“Incremental deposits are still being repriced, which will keep the cost of deposits high. Also, most of the transition in lending rates has already happened so bank margins will be under pressure,” said Santanu Chakrabarti, India BFSI analyst, BNP Paribas. “The impact may not be much because it is likely that low-cost CASA deposits will grow due to new credit formation.”

The withdrawal of ₹2,000 currency notes may also not offer much relief to banks because the flow of the high-value currency is likely to be slow and spread out, and the swapped funds may also not stay in the banking system for a long time.

“Deposit rates are unlikely to come down in a hurry, which will lead to some pressure on margins,” said Mona Khetan, analyst at Dolat Capital. “However, public sector banks could be better placed because a larger proportion of their loans are on the marginal cost of funds based lending rate (MCLR), which gets repriced with a lag sometimes even a year down the line.”

Analysts said that although deposit rates have gone up, banks still have a cushion as lending rates have been hiked faster.”Most of the deposit rate hikes have been in the 13-month basket, which is yielding 7.5%, while other rates are broadly where they were. Banks also have a wider high yielding loan portfolio, which can support margins,” said S Ranganathan, head of research at LKP Securities.

BNP Paribas’ Chakrabarti said some banks such as IndusInd, which have a high fixed rate book of CV/CEs and SME loans, will also be able to hold on better. “Confidence in the economy has improved so banks generally will take on more high yielding loans. Higher trading income due to falling bond yields will also cushion banking profitability,” he said.

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