Clipped from: https://economictimes.indiatimes.com
Surge in deposits to put pressure on banks’ net interest margins
NIM, or the differential between interest earned and spent, may narrow 10-15 basis points in the April-June quarter, rating agency Icra’s estimates showed. The impact of deposit rate cuts since April is partially offset by higher savings mobilisation and slower credit growth.
MUMBAI | KOLKATA: Banks are piling up liabilities much more quickly than assets on their books, with their deposit base expanding faster than it did last year despite an unabated fall in interest rates to record lows. And with softening demand for fresh credit, the industry’s net interest margins (NIM) could shrink — at least in the short run.
NIM, or the differential between interest earned and spent, may narrow 10-15 basis points in the April-June quarter, rating agency Icra’s estimates showed. A basis point is 0.01 percentage point. The impact of deposit rate cuts since April is partially offset by higher savings mobilisation and slower credit growth. Banks are mandated to invest a minimum of 18% of their deposits in sovereign securities to ensure compliance with the preset Statutory Liquidity Ratio (SLR).
“Incremental deposits are not earning any spread as they are primarily going to SLR bonds that provide yields similar to the bank’s blended average cost of deposits,” said Karthik Srinivasan, group head of financial sector ratings, Icra. “The scenario is unlikely to change unless credit demand picks up.”
Bank deposits have expanded at 11.3% at the end of June 5, significantly higher than the 8% annual growth seen in FY20, data from RBI showed. Total outstanding deposits were around Rs 140 lakh crore, compared with Rs 102.5 lakh crore of credit, including agriculture, corporate and individual loans.
Meanwhile, deposits in Jan Dhan accounts surged since April after the government’s decision to transfer the benefits directly into these accounts. Withdrawal from these accounts was also seen at around 50%, significantly lower than usual, according to bankers.
“Despite the downdrift in deposit rates, aggregate deposit growth is rising, both term and savings,” said Radhika Rao, India economist DBS Bank. “This might be driven by both an interest to lock in prevailing rates (especially term deposits) as these returns are expected to recede further. Also, depositors are preserving funds due to worries over income or employment risks,” she said.