India’s private sector banks are outperforming public sector lenders in maintaining and even expanding their net interest margins (NIMs) as they deftly manage balance sheets amid a challenging economic environment. The latest data from the Reserve Bank of India (RBI) shows that private banks have successfully widened the spread between lending and deposit rates, capitalizing on growing credit demand while keeping deposit rate hikes under control.
In contrast, public sector banks are facing increased pressure on their margins. While these lenders have raised lending rates, their aggressive deposit rate hikes have compressed their spreads, forcing a contraction of 54 basis points between April and July on fresh loans. Private sector banks, on the other hand, saw their spreads expand marginally to 3.90% in July, up from 3.87% in June. This is largely due to their ability to charge higher lending rates, coupled with a more cautious approach to deposit rate increases.
A key factor in the success of private sector banks is their high share of loans priced off the external benchmark-based lending rate (EBLR), which stands at 83% compared to 55% for public sector banks. The EBLR allows private lenders to swiftly pass on RBI’s policy rate hikes, boosting their lending rates and yields, particularly for margin-friendly retail loans such as personal and vehicle loans.
PSU banks struggle
Public sector banks, in contrast, are struggling to compete, with their market share in deposits and credit continuing to shrink. By June, public banks accounted for 58% of total deposits, down from 61% at the end of FY23, highlighting the ongoing shift toward private banks.
While private sector banks have an edge for now, the outlook remains uncertain. The RBI is expected to cut policy rates soon, which could put downward pressure on EBLR-linked loans. Additionally, with the upcoming festive season, banks may offer lower loan rates, which could further squeeze margins.
Public sector banks, however, could benefit from the growing demand for corporate loans as private capital expenditure increases, especially in infrastructure. This shift may ease some of the pressure on public lenders in the coming quarters.
