Image for representation.
Credit: iStock Photo
New Delhi: Net interest margin of scheduled commercial banks declined by 13 basis points year-on-year to 2.94 per cent in April-June 2024 quarter due to higher cost of deposits, data compiled by CareEdge Ratings showed on Tuesday.
"Term deposit growth was healthy, but CASA (current account savings account) decline impacted the cost of funds," the rating agency said in a report.
Interest expenses of scheduled commercial banks surged by 27 per cent year-on-year in the first quarter of the current financial year. While during this period interest income of the banks increased by 20.8 per cent. The sharper jump in expenses led to the decline in the interest margins, which determine banks’ profit.
Interest margins of private sector banks are hit harder. Net interest margins of public sector banks declined by 6 bps to 2.75 per cent in the first quarter of the current financial year Private sector banks witnessed a comparatively steeper decline of 25 bps to 3.20 per cent. Despite the sharper decline, interest margins of private sector banks remain higher than PSBs.
In Q1 FY25, credit offtake witnessed a robust 18.1 per cent year-on-year surge driven by mergers, economic growth, capital expenditure, and retail credit promotion. Banks have thrived with strong credit demand, despite NIM pressure, increased funding costs, and high loan to deposit ratios amid intense deposit competition, CareEdge noted in its report.
“With high credit to deposit (C/D) ratios, expanding the liability franchise is crucial for sustaining loan growth. We expect that credit growth will trail deposit growth. Thus, intensified deposit competition will lead to further straining of NIM in upcoming quarters as interest rate competition persists,” the rating agency said.
The C/D ratio stood at 80.6 per cent as of June 30, 2024, which is 430 bps higher. This is partly due to widening credit-deposit growth and HDFC merger impact.
Deposits of scheduled commercial banks jumped by 13.7 per cent year-on-year during the quarter under review. Deposits of private sector banks surged by 23.2 per cent, while PSBs registered a slower pace of 9 per cent. Deposit growth lagged credit growth with sluggish current account and saving account (CASA) growth (3.3 per cent), which was partially offset by the robust growth in Time Deposits (17.8 per cent). CASA ratio continued to decline and reached 32.3 per cent during the quarter.