MUMBAI: Indian banks are navigating a paradox where credit growth outpaces deposit growth but margins are under pressure. On paper, a scenario where credit outpaces deposit growth should be a recipe for higher profitability.
However, a deeper look at recent earnings calls for major public sector lenders shows that margins remain under pressure as deposit costs rise, low-cost current and savings account balances shrink, and competition for safe, highly rated borrowers intensifies.Pressure on net interest margins, or NIMs, has been a recurring topic on banks’ earnings calls. While systemic credit growth for scheduled commercial banks is around 16%, deposit growth lags at 12.3%, forcing lenders to increasingly rely on more expensive retail term deposits and larger deposits to fund loan growth.Banks have historically relied on current and savings account, or CASA, deposits as a low-cost funding source. That pool is now shrinking as savers shift their money into stocks, mutual funds, gold and real estate amid rising finance and inflation. SBI Chairman CS Sethi said the bank is adapting to the change in saving behaviour. “We are strengthening our liability franchise as savings increasingly shift towards market-linked instruments,” he said.
On Friday, India’s central bank surprised markets with net interest income growth of just 4% despite double-digit credit growth.Bank of India Managing Director and CEO Rajneesh Karnatak said that the banking system is witnessing structural changes in deposits. “There has been a structural change in terms of the color of deposit. A lot of money is flowing out of the banking system into other asset classes like stocks, mutual funds, gold, real estate, etc.
“So there was intense competition between banks on how to finance this coming credit growth.”To bridge the funding gap, banks are aggressively mobilizing retail term deposits. Term deposits at SBI grew by 14.7%, while Bank of Baroda announced a growth of 14.8%. But higher interest rates paid on these deposits raise the overall cost of funds and compress margins.Bank of Baroda MD Debadatta Chand said deposit rates remained high due to liquidity conditions. “If liquidity remains easy, the cost of deposits could come down. If liquidity remains as thin as it is, deposit interest rates are likely to remain fixed at this time,” Chand said.