To obtain a bank’s NIM, its net interest is divided by the amount of interest earning assets. Net interest is calculated as the difference between interest income from loans that banks disbursed and interest expended on deposits and money borrowed by banks. NIMs came under pressure as banks struggled to maintain the deposit growth amid rising credit demand at a time when traditional bank depositors were wooed by other investment avenues such as the soaring returns from stock market.
The year-on-year rate of increase in credit offtake improved significantly to above 16% at the end of March 2024 from under 6% in March 2021 excluding the effect of the merger between HDFC and HDFC Bank. The deposit growth rate, however, increased to just about 13% from 11% during the period. In a bid to secure deposits, rates on these deposits increased at a faster clip than the interest rates that banks charged on loans thereby putting pressure on NIMs.
After the RBI raised concerns over the rising gap between credit and deposit growth rates last December and its measures to curb the growth in unsecured loans, this gap has gradually started shrinking. During the fortnight ended September 6, 2024, credit offtake improved by 13.4% while deposit grew by 11.2%
Lower NIM’s have affected banks’ profit growth. For the given sample, pre-provisioning operating profit grew at an eight-quarter low of 10.3% in the June quarter. Among the sample banks, the public sector banks have been reporting a faster recovery with five of them showing improved NIM in the latest June quarter compared with just one in the December 2023 quarter.
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