Private banks take NIM hit in Q4 due to higher deposit rates

Private banks faced pressure on their Net Interest Margins (NIM) during the fourth quarter, as they offered higher deposit rates amid tight liquidity conditions.

Lenders have reported a year-on-year decline in NIM ranging from 5 to 50 basis points in the fourth quarter.

Weighted average deposit rates have increased more than lending rates in recent months, narrowing the interest spread and a slight decline in asset quality has necessitated increased provisioning by the banks, leading to compression of NIMs

Over the past six months, the rapid rise in the cost of funds, mainly driven by a significant uptick in term deposits compared to CASA (Current Account Savings Account), has led to a contraction of NIMs. Banks responded by adjusting their asset portfolios to include more high-yield assets, particularly in the retail segment, allowing them to offset the heightened cost of funds and stabilize NIMs at current levels.

Robust credit growth

Credit offtake increased by 20.2% year-on-year to Rs 164.3 trillion (including the merger of HDFC twins) and 0.7% sequentially for the fortnight ended March 22. Excluding the merger impact, the growth stood at 16.3% year-on-year for the fortnight. Deposits rose by 13.5% year-on-year to Rs 204.8 trillion for the same period, with a sequential increase of 0.3%. Excluding the merger effect, deposit growth was 12.9%.

Analysts expect continued pressure on NIMs for at least another two quarters, which will impact net interest income growth across private banks. However, relief from NIM compression is anticipated in the second half of the year.