Chakrabarti explained that, while fixed deposit (FD) repricing has stabilised, banks are likely to keep deposit rates elevated as they rely on deposits to sustain a strong funding base, especially amid the slowdown in corporate lending demand.
Despite the RBI’s comfortable liquidity stance, banks are cautious about reducing deposit rates until Current Account Savings Account (CASA) deposits see stronger growth. “It would be too bullish to assume deposit rates will fall before rate cuts,” he said.
Chakrabarti also pointed out that deposit growth has recently outpaced credit growth for the first time in several quarters.
On net interest margins (NIMs), he observed that banks are nearing a stable point, with minimal pressure expected in the immediate term. “Margins have almost bottomed out, and any incremental cost pressures will be minimal, particularly for major banks,” he added.
These are the edited excerpts of the interview.
Q. We went into the results season fearing higher cost of deposits and therefore, lower bank NIMs (net interest margins) and higher unsecured loans or NPAs (non-performing assets). Is all that behind us? Can we see margins rising in the current and next quarter?
A. Our view on margins has been that on a pre-rate cut basis, margins for the most part has almost bottomed out. Whatever incremental pressures are there on margins through cost of funds, is essentially in single digit basis points from here on, at least for the major banks. The reason for this is that the FD (fixed deposit) repricing, which was a critical driver of increase in cost of funds, is over. As long as CASA doesn’t pick up, your FD proportion within the book goes up. Therefore, to that extent, there could be a couple of basis points increase in cost of funds, but on a pre-rate cut basis, margins are near the bottom.
Q. At the moment, the RBI is keeping liquidity comfortable. It’s in contrast to what it was over the average of the previous 12 months. As you point out in your report, in the past 12 months, if you take the average the Reserve Bank has been tight. Won’t that itself start bringing down the cost of deposits or do you still think that deposits will remain high?
A. In itself, just without headline rates coming off at all. I don’t think there is further played downwards in terms of deposits.
Q. So, unless there is a rate cut, deposit costs will not fall?
A. No, they won’t. And especially since FD is the primary supporter of growth at this point, and you would have already seen that the headline growth for the month has actually come off quite a bit. This is one of the first quarters in a long time where deposit growth has been actually slightly in excess of credit growth. But what starts happening is that you start getting pickier about where you want to lend and where you don’t want to lend. And broad credit kind of slows down a little bit. The appetite for corporate loans has slowed down even further now.
It would be too bullish to assume that deposit rates will start to fall pre-rate cuts, but post rate cuts definitely, yes.
Q. In the results, is there a clear dichotomy? The big banks showed no pressure of unsecured loans, etc, but we did see that pressure once you come to a UCO, Bank of India, and IndusInd Bank and IDFC because of its MFI (microfinance). Is there a clear distinction that the biggies did well and the mid-level ones didn’t do all that well on asset?
A. In our last conversation, I was mentioning that Credit Access Grameen’s early disclosures have serious significance for the sector as a whole because this is one of the most well-known, arguably one of the best run MFIs in India. And here it was in its pre-disclosures, despite being geographically diversified, reporting a fairly significant sequential decline. That’s a very strong signal as far as asset quality and most other MFI portfolios go.
Obviously, banks are a little better placed because the liability support at least is issued in their case to tide through whatever troubles that the MFI segments may face.
So you’ll see a lot of the underperformances or disappointment of expectations for the quarter have actually come from microfinance.
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