Rise in deposit rates may contract banks’ margins in FY24: CareEdge Ratings

The increase in deposit rates could result in the contraction of the Net Interest Margin (NIM) of banks in financial year 2023-24, CareEdge Ratings has said in a recent report. NIM represents the difference between the interest income earned and the interest paid by a bank or financial institution.

In July, there was an uptick in fresh lending activity, coinciding with a decrease in fresh deposit rates. Conversely, interest rates pertaining to outstanding business loans continued their upward trajectory. It’s noteworthy that spreads between the Outstanding Weighted Average Lending Rate (WALR) and Weighted Average Domestic Term Deposit Rate (WADTDR) have dipped below pre-pandemic levels since June 2023. Moreover, the spread between fresh WALR and WADTDR remains narrower compared to the spread between outstanding WALR and WADTDR, states the report. 

“Banks’ profit margins reached their peak in the fiscal year 2023. However, it is anticipated that NIM will contract during the current fiscal year, primarily due to the escalation in deposit rates. Despite the Monetary Policy Committee hitting pause, banks have continued to raise interest rates on their existing loan portfolios. A reduced level of systemic liquidity is expected to exert upward pressure on money market rates, contributing to the containment of inflationary pressures. Nonetheless, it is important to note that despite the additional cash reserve requirement imposed under I-CRR, systemic liquidity is projected to remain in a surplus state,” stated in a report titled “Deposit Rate Rise Leads to Spread Compression, Fresh Rates Volatile by CareEdge Ratings. 

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The WADTDR on outstanding rupee term deposits increased by 8 bps from 6.47 per cent in June to 6.55 per cent in July, while WALR remained flat. 

Similarly, WADTDR on fresh rupee term deposits of SCBs increased marginally by 1 bps from 6.34 per cent in June to 6.35 per cent in July. However, the weighted average lending rate (WALR) on fresh rupee loans of scheduled commercial banks (SCBs) increased sequentially by 24 basis points (bps) to 9.44 per cent in July from 9.19 per cent in June.

Credit off-take continued its robust expansion, with a consecutive YoY increase of 19.7 per cent over two successive fortnights, culminating in a total of Rs. 148.8 lakh crore for the fortnight ending August 11. This remarkable surge can be largely attributed to the merger of HDFC with HDFC Bank, alongside the steady expansion of personal loans and NBFCs. However, if we exclude the impact of the merger, credit growth showed a relatively lower rate of 14.8 per cent YoY compared to the previous year.

Simultaneously, deposits also demonstrated healthy growth, registering a 13.5 per cent YoY increase for the same fortnight, considering the merger's effects. It’s important to note that deposit growth lagged behind credit growth, mainly because a significant portion of HDFC’s liabilities consisted of borrowings rather than deposits. Despite this disparity, deposit growth reached a six-year high in the current fortnight.