Q3 Review: Indian Banks Benefit from Strong Loan Demand Despite Margin Challenges

Indian Banks

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.

In conclusion, while Indian banks celebrate robust loan demand and improved asset quality, they must navigate the persisting challenge of margin pressures amidst an evolving regulatory landscape and shifting consumer preferences.

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