Indian Banks Under Pressure: NIM Strain as Interest Rates Decline

Indian banks are experiencing pressure on their net interest margins (NIMs) amid declining interest rates, following the Reserve Bank of India's rate cut. While credit demand boosts growth, competition for deposits and high deposit rates challenge lending rates, squeezing margins further.

Indian banks are under renewed pressure as their net interest margins (NIMs) face strain due to falling interest rates. This follows the Reserve Bank of India's (RBI) first rate cut in nearly five years, creating a challenging scenario for financial institutions.

The October-December quarter of FY24 saw positive loan growth in five out of six top banks, with increases over 12% year-over-year, according to S&P Global Market Intelligence data. However, despite increased lending, net interest margins remain under stress as deposit rates catch up.

Market analysts, including those from Nomura, anticipate additional rate cuts by 2025, potentially starting in April, reaching a terminal rate of 5.50% by the end of that year. Elevated deposit rates due to tight liquidity have borrowers advocating for reduced lending rates, compressing margins further.

The State Bank of India (SBI), the nation's biggest lender, exhibited a 17 basis point year-over-year decline in NIM, reducing to 2.86% in Q3 FY24. Nonetheless, SBI reported solid credit growth of 14%, driven largely by retail, agricultural, MSME, and corporate loans.

Bank deposit growth lags, with more clientele favoring high-interest fixed deposits over savings accounts, thus increasing cost pressures for banks. SBI Chairperson Challa Sreenivasulu Setty described this as a "behavioral change," which impacts margins.

Goldman Sachs highlighted competitive pressures in deposit acquisition restricting banks' ability to boost loan yields. Other state-owned banks face similar margin squeezes, evidenced by Bank of Baroda's NIM drop by 20 basis points and Punjab National Bank declining by 19 basis points.

(With inputs from agencies.)