Indian Banks Grapple with Growth Slowdown Despite Higher Interest Rates: S&P Report

Indian banks are facing a slowdown in both growth and profit margins as deposits lag behind despite higher interest rates, according to a report by S&P Global Market Intelligence.

In the October-to-December quarter of 2023, most major banks reported gains in income. However, their net interest margins (NIM) took a hit due to tighter liquidity and rising funding costs.

Punjab National Bank was the only large bank to see an increase in NIM for the fiscal third quarter, as per data compiled by S&P.

State Bank of India, the country’s largest bank by assets, recorded lower net income after factoring in a Rs 7,100 crore expense related to a wage bill increase.

Various factors such as lower treasury gains, margin contraction, asset quality issues, and restrictions on alternate investment funds (AIFs) contributed to mixed results for Indian banks, explained Anand Dama, an analyst at Emkay Global.

The recent directive from the Reserve Bank of India (RBI) barring banks and nonbank financial companies from investing in AIFs holding customer assets aims to prevent loan evergreening. This move is expected to impact billions in bank investments and potentially hinder growth.

Despite these challenges, India’s economy remains the world’s fastest-growing among major nations. The government’s plans to reduce borrowing in the upcoming fiscal year have surprised bond markets, signaling hope for increased private investment.

The RBI forecasts a 7% GDP growth for the fiscal year starting April 1, supported by improving consumption and an expected uptick in private capital expenditure. However, the central bank opted to hold interest rates steady in its recent review on February 8.