Kamal Ghorui
MUMBAI: Indian banks are navigating a paradox where credit growth is outstripping deposit growth but margins are under pressure. On paper, a scenario where credit outstrips deposit growth should be a recipe for soaring profitability. However, a deeper look into the recent earnings calls of major public sector lenders shows that margins remain under pressure as deposit costs rise, low-cost current and savings account balances shrink and competition for safe highly-rated borrowers intensifies.The pressure on net interest margins, or NIMs, was a recurring theme in the earnings calls of banks. While systemic credit growth for scheduled commercial banks stands at around 16%, deposit growth is trailing at 12.3%, forcing lenders to rely increasingly on costlier retail term deposits and bulk deposits to fund loan growth.Banks have historically depended on current account and savings account, or CASA, deposits as a low-cost source of funding. That pool is now shrinking as savers shift money into equities, mutual funds, gold and real estate amid rising financialisation and inflation. SBI chairman CS Setty said the bank was adapting to the change in savings behaviour. “We are strengthening our liability franchise as savings increasingly shift towards market-linked instruments,” he said. On Friday, SBI surprised markets with only a 4% net interest income growth despite double digit credit growth.Bank of India MD and chief executive Rajneesh Karnatak said the banking system was seeing structural changes in deposits. “There has been a structural change which has happened as far as the colour of the deposit is concerned. A lot of funds are flowing out of the banking system into other asset classes like equity, mutual fund, gold, real estate and others. So there has been a lot of competition among the banks on how to fund this credit growth which is coming,” he said.To bridge the funding gap, banks are mobilising retail term deposits aggressively. SBI’s term deposits grew by around 14.7%, while Bank of Baroda reported growth of 14.8%. But the higher rates paid on these deposits are raising the overall cost of funds and compressing margins.Bank of Baroda MD Debadatta Chand said deposit pricing remained elevated because of liquidity conditions. “If the liquidity continues to be easy the cost of deposit can go down. If the liquidity remains tight the way it is then possibly deposit rates will be sticky at this point of time,” Chand said.
