 "Bank NIMs to compress 10-120 bps in FY24: Rating agencies CRISIL and ICRA")
Feeling the effects of rising deposit rates, the Indian banking system’s net interest margins (NIMs) are expected to compress by 10-20 basis points (bps) for the current financial year (2023-24, or FY24), according to rating agencies CRISIL and ICRA.
NIMs could be about 3.1-3.2 per cent, against 3.2 per cent in 2022-23 (FY23). Even after moderation, they will still be above pre-pandemic levels of 2.7-2.8 per cent.
Karthik Srinivasan, senior vice-president and group head, ICRA, said there will be upward pressure on deposit costs as the deposit base reprices significantly in FY24. This will put pressure (10-15 bps) on NIMs. Yet, banks’ robust loan growth will help keep core operating profits at a steady level.
NIMs for the banking sector have peaked.
Competition for deposits has driven banks to hike rates since October 2022, and they could increase further, given that deposit growth continues to lag credit growth, says Krishnan Sitaraman, senior director and chief ratings officer, CRISIL Ratings.
An estimated 30-35 per cent of deposits are expected to come up for repricing in FY24, at higher rates, and the shift from current and savings deposits to term deposits, CRISIL added.
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While interest margins may be hit due to the cost of liabilities, what will offset overall bank profitability is a reduction in credit costs. The gross non-performing asset levels are at a decadal low of about 3.9 per cent in March 2023 and provision cover of bad loans at 75 per cent for the banking system.
Credit costs, which had started to correct in 2020-21, from Rs 1.8 per cent on average between 2015-16 and 2019-20, are estimated to have dropped to 0.7 per cent in FY23 and are expected to fall further in FY24, according to CRISIL.
ICRA said the moderation in credit costs will translate into a steady return on assets for banks at 1.1 per cent for FY24, compared with 1.1 per cent for FY23.