Faced with the pressure of rising fund costs, the Net Interest Margin (NIM) of Indian banks is likely to decline further by about 30 basis points over the next few quarters. After witnessing a peak of 3.3 per cent in Q3FY23, NIMs have been on a downward trajectory to 3.13 per cent in Q2FY24, reflecting the impact of rising fund costs, according to CARE Ratings.
Banks are still grappling with policy rate hikes on deposits, along with regulatory actions on unsecured lending. The NIMs are expected to further moderate in the coming quarters and are estimated to be around Q2FY22 range (prior to the rate hike cycle levels), the rating agency said. The Reserve Bank of India began raising the policy repo rate (from 4.0 per cent level) in May 2022. It currently stands at 6.5 per cent.
NIMs are expressed in percentage terms and are determined by subtracting interest expenses from interest income. NIMs of banks stood at 2.83 per cent in Q2FY22. NIMs were at 2.45 per cent for public sector banks and 3.59 per cent for private sector banks in Q2FY22.
In terms of sequential performance, margins of Scheduled Commercial Banks (SCBs) declined 14 bps to 3.13 per cent, driven by private sector banks which declined 27 bps and public sector banks (PSBs) saw a decline of 10 bps. This can be attributed to the merger and deposit rates being repriced as an increase in policy rates. This margin moderation is expected to continue as the cost of deposits is anticipated to remain elevated, CARE Ratings said.
According to the latest RBI data, the weighted average interest rate on domestic term deposits has risen to 6.76 per cent in October 2023 from 6.47 per cent in June 2023 and 5.62 per cent in November 2022.
The rising interest rates have pushed the cost of deposits. For public sector banks, the cost of deposits rose to 4.93 per cent in the quarter ended September 2023 (Q2FY24) from 4.68 per cent in June 2023 (Q1FY24) and 3.93 per cent in September 2022 (Q2FY23). For private banks, the rise in the cost of deposits has been much sharper, to 5.73 per cent in Q2FY24 from 4.99 per cent in Q1FY24 and 4.13 per cent in Q2FY22.
Net Interest Margins (NIM) trajectory of Indian Banks (%)
In % |
Q2 Fy22 |
Q3 Fy22 |
Q4 Fy22 |
Q1 Fy23 |
Q2 Fy23 |
Q3 Fy23 |
Q4 Fy24 |
Q1 Fy24 |
Q2 Fy24 |
PSBs |
2.45 |
2.54 |
2.45 |
2.48 |
2.71 |
2.89 |
2.90 |
2.87 |
2.77 |
Private |
3.59 |
3.65 |
3.59 |
3.69 |
3.82 |
4.08 |
3.99 |
3.99 |
3.72 |
All Banks |
2.83 |
2.92 |
2.84 |
2.90 |
3.09 |
3.30 |
3.28 |
3.27 |
3.13 |
Source – Ace Equity, Bank filings & CareEdge Calculations
First Published: Dec 17 2023 | 5:06 PM IST