Indian banks face a slowdown in growth and profit margins as deposits lag despite higher interest rates, according to S&P.
In the 2023 October-to-December quarter, most major banks reported income gains, but net interest margins (NIM) declined due to tighter liquidity and rising funding costs.
Among large banks, only Punjab National Bank saw an increase in NIM for the fiscal third quarter, according to data compiled by S&P Global Market Intelligence.
State Bank of India, India’s largest bank by assets, posted lower net income after factoring in a Rs 7 100 crore expense related to a wage bill increase.
Lower treasury gains, margin contraction, asset quality issues for some institutions and the impact of restrictions on alternate investment funds (AIFs) drove mixed results for Indian banks, according to Anand Dama, an Emkay Global analyst. “We expect the growth and margins to moderate, though the pace of fall could be slightly lower for margins,” Dama said in comments on Indian banks’ fiscal third-quarter earnings.
The Reserve Bank of India (RBI) recently barred banks and nonbank financial companies from investing in AIFs holding the lenders’ customer assets. This move aims to prevent loan evergreening. Lenders must divest AIF holdings within a month or set aside provisions. Industry groups anticipate the directive will affect billions in bank investments and potentially hinder growth.
India’s economy remains the world’s fastest-growing among major nations as Prime Minister Narendra Modi’s government prepares for elections due by May. While government spending spurred growth in 2023, plans to reduce borrowing in the upcoming fiscal year have surprised bond markets. The shift signals hope for private investment increases.
The RBI predicts 7% GDP growth for the fiscal year starting April 1. Improving consumption and an expected private capital expenditure uptick, underpinned by strong bank and corporate balance sheets, support this outlook. Nonetheless, the central bank held interest rates steady in its Feb. 8 review.
Deposits trail
Indian bank deposit growth continues to lag behind credit growth. RBI data released in December 2023 shows an 11% deposit growth in fiscal 2022–2023, compared to 15% credit growth.
This widening gap has pushed the credit-to-deposit ratio to a 10-year high, a development attributed partly to the RBI’s use of macroprudential measures to tighten policy, according to Nomura analysts in a Feb. 8 report.
State Bank of India’s chairman, Dinesh Khara, anticipates 12% to 13% deposit growth in fiscal 2024, with credit growth at 14%.
Credit growth could moderate in fiscal 2025 if deposit growth remains slow and competition for funds increases deposit costs, Nikita Anand, S&P Ratings analyst, said.
Surging retail loans
Indian retail lending is likely to continue growing. Banks have seen an increase in retail lending despite central bank concerns about the rapid rise of unsecured loans. These reached 35% of bank portfolios in 2023, up from 25% in 2007, according to a Jan. 18 research paper by RBI employees. In November 2023, the central bank increased risk weights on unsecured personal loans in response.
Despite the risks, retail unsecured loans remain “extremely profitable,” Srinivasan Vaidyanathan, CFO of HDFC Bank Ltd., said during the bank’s Jan. 16 earnings call.
Nonperforming loans at major banks declined year over year in the third quarter, except for HDFC Bank, where they rose to 328.15 billion rupees from 211.18 billion rupees.
Banks may increase unsecured retail lending to offset margin pressures from tighter liquidity, Ratings’ Anand said. “Yields on unsecured retail loans are higher, and their increasing share will be beneficial to net interest margins.”
ICICI Bank has tightened its credit parameters for unsecured loans. “We’ve also rationalised sourcing payouts and moved our pricing on personal loans by maybe 20, 25 basis points,” said ICICI Bank CFO Anindya Banerjee during the lender’s earnings call.
