Indian Banks To See Margin Pressure In FY24, Fitch Says

Fitch Ratings said Indian banks' net interest margin (NIM) will face pressure in the next financial year ending March 2024 (FY24).

The NIM will come under pressure as the Indian lenders increase deposit rates to attract funds to support sustained high loan growth, Fitch said in a statement. Under its base case, it expects the Indian banking sector's average NIM in FY24, which begins from 1 April 2023, to contract by about 10 basis points to 3.45%, following a 15 basis points rise in FY23 to 3.55%.

The margins, however, will remain well above that in prior years (FY17-FY22 average: 3.1%), according to the statement.

The rating agency said the contraction is consistent with the lagged normalization in deposit rates. However, banks should be able to offset some of the impact as they gradually pass through policy rate hikes to corporate loans, which are typically slower to reprice than retail and small and medium-sized enterprises (SME) loans, it added.

Fitch said the sector's average loan growth reached 17.5% in 1HFY23, with the trend continuing in December 2022 as per latest central bank data, compared with the rating agency’s full-year estimate of 13% for FY23. This is partly driven by pent-up credit demand and normalization of excess savings built up during the pandemic, as well as corporate borrowers migrating from the local bond markets towards banks given the significant hardening in bond yields, it noted.

The expansion in banks' NIM in recent years -- to 3.5% in 1HFY23 from 2.9% in FY19 -- was due to a decline in funding costs, driven by a sustained period of low credit demand and high liquidity, rather than higher loan pricing, the rating agency said.

The sector's increased focus on higher-yielding segments like unsecured personal loans, credit cards and consumer durable loans, may have helped somewhat, Fitch said. However, the steady increase in the sector's loan-to-deposit ratio to 75% by the of December 2022 from 71% at FY22E led to an accelerated transmission of the central bank's 225 basis points rate hikes in 2022 to deposit rates since 1HFY23, thus pushing up banks' cost of funds, it noted.

The loan growth continuing to outstrip deposit growth -- as seen in the past few months -- is a potential risk to its assessment, Fitch said.

NIMs could face greater pressures if banks are forced to increase deposit rates further and turn to wholesale funding, for which costs are rising, it noted.