Indian Banks Navigate Strong Loan Demand Amid Margin Pressures
In the third quarter of the fiscal year, Indian banks witnessed a surge in loan demand alongside significant challenges regarding net interest margins. While private banks experienced rapid domestic loan growth outpacing their public-sector counterparts, public sector banks (PSUs) notably contributed to improving asset quality by reducing slippage ratios.
Driving Factors Behind Q3 Performance
Loan Growth Disparity Between Private and Public Banks
Private banks demonstrated a notable edge in domestic loan growth compared to their public-sector counterparts. However, the standout performance in asset quality improvement came from PSU lenders, showcasing a decline in slippage ratios.
Margin Pressures: A Common Theme
The prevalent theme across Q3 financial reports was the strain on net interest margins (NIMs). With tightening system liquidity and the Reserve Bank of India (RBI) yet to initiate rate cuts, banks faced the necessity of offering higher interest rates to attract depositors, consequently squeezing NIMs.
Margin Challenges and Outlook
CASA Growth Disappointment
The disappointment in margins stemmed partially from lower-than-expected growth in current accounts and savings accounts (CASA), which serve as a cost-effective source of funds for banks.
Analysts’ Insights on Margin Outlook
Analysts foresee continued pressure on margins until rates stabilize. They anticipate the repricing of term deposit (TD) stock and a higher TD proportion in net demand and time liabilities (NDTL) to gradually ease out by 1QFY25.
Growth Drivers in Indian Banking Sector
Retail-Led Credit Growth
Bank credit in India is expanding at a faster rate (16 percent) than GDP growth (9 percent), propelled by various factors including robust growth in consumer loans, increased lending to SMEs, inflation-driven growth in working capital credit, and a surge in capex activities.
Regulatory Emphasis on Retail Credit
Regulators have underscored the significant shift towards retail-led growth in bank credit. Retail loans have witnessed rapid expansion, particularly unsecured lending, leading to an increased share of retail lending in total gross advances.
Future Challenges and Projections
Deposit Mobilization Challenge
Analysts highlight a significant challenge for banks in the form of continued loan growth outpacing deposit growth. The loan-to-deposit ratio (LDR) across the banking system is at a 10-year high, indicating the difficulty in balancing loan expansion with deposit mobilization.
Outlook for Loan Growth
While systemically tight liquidity may be transient, the challenge of achieving sustainable loan growth through deposit mobilization is expected to persist in the medium term. Analysts project a moderation in system loan growth to 14 percent–13 percent by FY24–25F.
