Banks to face margin pressure next fiscal

Banks will face margin pressure next fiscal as they increase the deposit rates to attract funds to support sustained high loan growth, and the same will fall by 10 basis points to 3.45 per cent, a global rating agency said on Monday.

“We expect the domestic banking sector’s average net interest margin to slightly contract by about 10 bps (basis points) in FY24 to 3.45 per cent, following a 15 bps increase in FY23 to 3.55 per cent, in a base case scenario, but remain well above that during FY17-FY22 average of 3.1 per cent,” Fitch Ratings said in a report.

However, the 10 bps likely reduction in margin is unlikely to affect banks’ profitability in the near term. Higher fee income stemming from higher loan growth and a revival in treasury gains should broadly counterbalance the twin pressures of higher credit costs and funding costs in FY24, while supporting capitalisation.

This contraction is consistent with the lagged normalisation in deposit rates, although banks should be able to offset some of the impact as they gradually pass-through policy rate hikes to corporate loans, which are typically slower to reprice than retail and SME loans, it added.

However, loan growth continuing to outstrip deposit growth is a potential risk. NIMs (Net Interest Margins) could face greater pressures if banks are forced to increase deposit rates further and turn to wholesale funding, for which costs are rising.