Narrowing Net Interest Margins in Banks Due to Rising Deposit Costs

A recent report reveals that rising deposit costs have led to a significant narrowing of banks' net interest margins (NIM) in the June quarter. Private sector banks experienced a more substantial impact compared to their state-run counterparts. Deposit growth was faster in private banks, but the overall net interest income increased only modestly.

The rising deposit costs amid the ''war for deposits'' has led to a narrowing in banks' net interest margin (NIM) in the June quarter, a report said on Monday. The NIM—a key determinant of banks' profitability for its ability to influence the core income—narrowed 0.13 per cent to 2.94 per cent compared with the year-ago performance, CareEdge Ratings said in a report.

Compared to the preceding March quarter, the NIM was down 0.04 per cent, the report said.

The private sector banks seem to have suffered the most when it comes to the trends on the NIMs, with a 0.25 per cent narrowing in NIM compared to the year-ago period at 3.20 per cent, it said, adding that the larger ones among the cohort had their NIMs decline only 0.07 per cent.

However, when seen from a sequential perspective, the private sector banks have performed better than their state-run counterparts by reporting a 0.03 per cent expansion in NIM as against a 0.09 per cent decline for the other grouping.

The deposit growth for all the scheduled commercial banks in the system came at 13.7 per cent, whereas the private sector banks had the same growth at 23.2 per cent on a year-on-year basis.

The narrowing of the NIMs at a system level had an impact on the net interest income, and the core revenue line moved up by a relatively slower 9.7 per cent to Rs 2.03 lakh crore, the agency said.

The 18.1 per cent credit growth helped the core income growth, but rise in deposit costs and dip in yields on advances restricted the growth, it said.

The credit deposit ratio stood at 80.6 per cent, up over 4 percentage points, the report said, adding that apart from the slower deposit mobilisation growth, the HDFC merger also had an impact on the same.

(With inputs from agencies.)