In the face of higher interest rates and tighter liquidity, Indian banks are navigating a challenging landscape marked by sluggish deposit growth and narrowing profit margins. The October-to-December quarter of 2023 saw most major banks reporting income gains, but net interest margins (NIM) took a hit due to rising funding costs and liquidity constraints.
Data compiled by S&P Global Market Intelligence reveals that among large banks, Punjab National Bank (NS:PNBK) was a standout performer, witnessing an increase in NIM for the fiscal’s third quarter. However, the State Bank of India (NS:SBI), the country’s largest bank by assets, experienced a decline in net income, impacted by a significant expense related to a wage bill increase totalling 71 billion rupees.
Adding to the industry’s challenges, the Reserve Bank of India (RBI) recently imposed restrictions on banks and non-bank financial companies, prohibiting investments in Alternative Investment Funds (AIFs) holding customer assets. This measure, aimed at curbing loan evergreening, requires lenders to divest AIF holdings within a month or allocate provisions accordingly. Industry experts anticipate significant implications for bank investments, potentially impeding growth prospects.
The disparity between credit and deposit growth further exacerbates concerns, with RBI data indicating an 11% deposit growth compared to 15% credit growth for fiscal 2022–2023. This growing imbalance has pushed the credit-to-deposit ratio to a 10-year high, partly attributed to the RBI’s adoption of macroprudential measures to tighten policy, as noted by Nomura analysts in a recent report.
Despite these challenges, Indian retail lending remains a bright spot, with banks witnessing continued growth in this segment. However, concerns linger over the rapid expansion of unsecured loans, which accounted for 35% of bank portfolios in 2023, up from 25% in 2007, according to research published by RBI employees in January 18. In response, the central bank raised risk weights on unsecured personal loans in November 2023.
As Indian banks navigate a complex operating environment characterized by regulatory interventions and shifting market dynamics, their ability to adapt and innovate will be crucial in sustaining growth and profitability in the foreseeable future.
