ICICI Bank: retail, rural portfolio stress spikes
Subscribe to enjoy similar stories. If loan defaults are growing faster than loan growth for any bank, it is a sign of worry. Take ICICI Bank, for instance.
It increased the retail and rural loan portfolio by 11% year-on-year (y-o-y) in the December quarter (Q3FY25). Yet, this was accompanied by a 17% growth in gross non-performing asset (NPA) additions or fresh defaults in the segment. Contrast this with the corporate and business banking (CBB) loan portfolio, which grew by 21% and saw a drop in gross NPA additions.
The trend in CBB’s gross NPA additions has been stable at about ₹800 crore quarter-on-quarter (q-o-q). Overall, ICICI’s gross NPA ratio trend shows improvement, with a linear decline to 1.96% in Q3FY25 from 2.3% in Q3FY24. ICICI has achieved q-o-q stability in net interest margin at 4.25%.
However, in a media interaction after the Q3FY25 results, the bank’s management reiterated the obvious fact that a lower interest rate regime is negative for banks as far as NIM is concerned. Why does a low interest rate hurt a bank’s profitability? One, a bank’s net worth that has no interest cost starts earning less interest income. Two, a bank does not benefit from lower deposit rates on its total deposits as it anyway pays no interest on current account deposits and low interest on savings account deposits.
Three, loans get repriced faster than deposits, with many loans being on a floating rate. As the Street is aware, investors are already bracing for the negative impact of any rate-cutting cycle by the Reserve Bank of India (RBI) as and when it begins. That is the time when the trough level of NIM will become clear.
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