Rising Deposit Costs Shrink Banks' Net Interest Margins in First Quarter

The increasing costs of deposits amid the competition for funds have led to a reduction in banks' net interest margin (NIM) during the June quarter, according to a report released on Monday. CareEdge Ratings highlighted that the NIM, which is crucial for banks' profitability as it affects core income, decreased by 0.13 per cent to 2.94 per cent compared to the same period last year.

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Private Sector Banks' Performance

Private sector banks experienced the most significant impact on their NIMs, with a reduction of 0.25 per cent from the previous year, bringing it to 3.20 per cent. However, larger private sector banks saw a smaller decline of only 0.07 per cent. Sequentially, private sector banks performed better than state-run banks, showing a 0.03 per cent increase in NIM compared to a 0.09 per cent decrease for state-run banks.

Deposit and Credit Growth

Scheduled commercial banks recorded a deposit growth of 13.7 per cent, while private sector banks saw a higher growth rate of 23.2 per cent year-on-year. Despite this growth, the narrowing NIMs affected net interest income, which increased by a slower rate of 9.7 per cent to Rs 2.03 lakh crore.

The report also noted that credit growth stood at 18.1 per cent, which supported core income growth. However, rising deposit costs and lower yields on advances limited this growth.

Impact on Core Revenue

The overall impact of narrowing NIMs at the system level was evident in the slower increase in core revenue lines. The credit-deposit ratio rose by over four percentage points to 80.6 per cent. The report mentioned that apart from slower deposit mobilisation growth, the HDFC merger also influenced this ratio.

In summary, while credit growth has been robust, increased deposit costs and reduced yields on advances have constrained overall income growth for banks during the June quarter.