Deposit Delays and Liquidity Crunch to Impact Banks' Profitability

A recent CareEdge report suggests that banks may face challenges in the near future due to delays in deposits and liquidity shortages. These factors are expected to increase the cost of funds for banks, which could put pressure on their net interest margins and overall profitability.

The report also highlights that the credit-deposit ratios of banks may remain high as deposit growth lags behind the pace of credit expansion. While the overall asset quality of banks is expected to remain stable, there is a need for close monitoring of the retail portfolio.

With the central bank tightening its monetary policy, liquidity in the economy is shrinking. This, combined with slow deposit growth compared to credit growth, is raising the cost of funding for banks, affecting their net interest margins.

CareEdge Ratings predicts a slight decline in return on total assets (ROTA) for banks in the coming fiscal year due to rising costs and a persistent gap between deposit and credit growth rates.

Additionally, following RBI guidelines, the growth rate of personal loans has slowed down in the third quarter of the fiscal year. However, overall credit growth has been strong, driven by personal loans and the services sector.

Despite challenges, banks have seen significant growth in credit over the past two years, supported by surplus liquidity and low credit costs during the Covid period. However, increasing interest rates and slower deposit growth may pose challenges to banks’ profitability in the future.