Indian banks’ net interest margins (NIMs) are likely to face pressure in the next financial year 2023-24 owing to an increase in deposit rates to attract funds to support sustained high loan growth. Fitch Ratings expect the average margins of banks to contract slightly by 10 bps to 3.45% in FY24.
In its report, Fitch said, “we expect the Indian banking sector’s average NIM to slightly contract by about 10bp in FY24 to 3.45%, following a 15bp increase in FY23 to 3.55%, under our base case, but remain well above that in prior years (FY17-FY22 average: 3.1%).”
According to the rating agency, this contraction is consistent with the lagged normalisation in deposit rates, although banks should be able to offset some of the impacts as they gradually pass-through policy rate hikes to corporate loans, which are typically slower to reprice than retail and SME loans.
Fitch also believes that loan growth continuing to outstrip deposit growth – as seen in the past few months – is a potential risk to our assessment.
It added, “NIMs could face greater pressures if banks are forced to increase deposit rates further and turn to wholesale funding, for which costs are rising.”
The risks may potentially be pronounced if higher interest rates are unable to meaningfully moderate credit demand and increase deposit inflows as Fitch expects under its base case.
Although NIM is expected to drop by 10 bps, however, Fitch does not expect it to affect banks’ profitability in the near term.
In Fitch’s view, higher fee income – stemming from higher loan growth – and a revival in treasury gains should broadly counterbalance the twin pressures of higher credit costs and funding costs in FY24 while supporting capitalisation.
But if margins drop beyond Fitch’s base case which is 10 bps, the positive outlooks on some of the banks’ earnings and profitability scores would come under pressure.
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