The net interest margin of banks is expected to decline further in the remainder of this financial year as the competition for deposits intensifies, CareEdge said in a report.Additionally, the report notes that competition would also cap the interest rates charged at a certain level, exerting pressure on the margins.Deposit growth was healthy in the September quarter, aided by an increase in term deposits, with banks raising interest rates on these deposits in recent months.
However, the growth in low-cost current account savings account (CASA) deposits has lagged, leading to a rise in funding costs.”As the Credit-to-eposit ratio remains elevated, growth in the liability franchise will play a significant role in sustaining loan growth. The competition for deposits is likely to intensify even further,” the report said.The CASA ratio of banks fell to 40.1% as of September 30 from 42.6% a year ago as banks clamored for deposits at a higher price. The cost of funds for state-owned banks and private banks rose by 100 and 160 basis points, respectively, in July-September.
Here, the growth in the liability franchise of banks will be integral to sustaining loan growth.While the HDFC merger has helped improve the overall loan growth numbers, it has led to tighter margins as non-bank lenders typically operate at a lower margin than banks. Considering the size of HDFC’s balance sheet, the impact on margins will likely persist, the report said.Also, the recent Reserve Bank of India (RBI) move to increase risk weights on unsecured consumer credit will likely deter the growth in consumer loans.”Hence, growth in unsecured loans, which is a comparatively higher-yielding product, is likely to slow and consequently impact credit growth as well as NIMs,” the report said.