Banks will have to focus on enhancing the share of low-cost current account and savings account deposits to reduce margin pressures arising on account of higher transmission to deposit rates, besides investments in technology to reduce costs, said ratings firm India Ratings.
Mobilising deposits is expected to be the banking sector’s major near-to-medium term challenges, while at the same time they have to minimise the impact on margins. ECL or expected credit losses based provisions (once final guidelines are released) could mean significant impact for a few banks. But the healthy operating buffers, low incremental credit costs, high provision coverage ratio and the possibility of defraying of additional provisioning requirements over a few years provide comfort according to India Ratings
The banking system’s net interest margins (NIMs) are likely to modestly decline in FY24, given that repricing pressure on deposit rates will continue to play out even as the competition for deposit accumulation continues.
A continued focus on enhancing the share of low-cost (current account and savings account) deposits is also likely to reduce margin pressures, the ratings firm said. Also, banks are likely to continue to tinker with deposit rates in select maturity buckets to meet the asset-liability management requirements. Additionally, with the HDFC Bank Ltd and HDFC Limited amalgamation now completed, the larger appetite of the combined entity for deposits will have a bearing on the market dynamics.
India Ratings also expects operating costs to sustain with ongoing investments in technology, and the banking system would continue to see lower slippages (gross slippage less upgrades and recoveries of 0.5%-0.6% and credit costs (1%-1.3%) that could give them the wherewithal to withstand near-term pressures. The asset quality metrics for public sector banks and private banks are converging and profitability is at about steady state.
The ratings firm expects gross non-performing advances and net non-performing advances for the system to be 3.2% and about 0.8%, respectively, in FY24. Provision cover is expected to remain at the current levels of about 75%, aided by legacy provisions and decreasing slippages (slippages net of upgrades and recoveries; around 0.54% in FY24).
