Margin, deposit pressure likely to spoil banks’ June quarter show

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₹24.87 trillion, weighed by a fall in corporate and wholesale loans. Total deposits were flat quarter-on-quarter at ₹23.79 trillion. The mismatch in credit and deposit growth has been plaguing the sector for a while now.

Overall credit growth has been sustaining at around 16% year-on-year, aided by robust demand from the retail segment for housing, personal and consumption loans. At the same time, systemic deposits have expanded at about 13% year-on-year, with a bulk of retail flows going towards equity markets in the form of SIPs. This has led to the credit-to-deposit (CD) ratio for banks remaining uncomfortably high (75% and above).

As a result, lenders find themselves caught between a rock and a hard place—either sacrifice growth by going slow on advances or raise the deposit rates to mobilize funds, which, in turn, will dent their net interest margins (NIMs). Analysts expect the trend to be discernable in banks’ upcoming Q1 results. “We continue to believe that the growth-NIM conundrum may persist and the strain will sustain...

We see NIM impact on three counts: a) continued repricing on back deposit book, b) sticky incremental deposit costs as a few banks raised (card) rates in Q4FY24 and c) higher interest income reversal given higher agri slippages (for some)," Elara Securities said in a note. The country’s largest lender State Bank of India hiked its term deposit rates twice last quarter, while HDFC too increased rates for select tenures. Compounding the trouble for banks is the declining share of the CASA (current account savings account) deposits, which is the cheapest source of funds for banks.