Impact of Rising Deposit Costs on Indian Banks in Q2FY25
In the second quarter of the financial year 2024-25, Indian banks are experiencing pressure on their net interest margins (NIM) due to increased deposit costs. While most banks are expected to maintain stable NIMs, a few may see slight declines. The banking sector is showing stable asset quality, with slippages remaining similar to the previous quarter. Some banks may even experience lower slippages due to seasonal factors.
Provisions across banks vary, with Bank of Baroda and RBL Bank expected to see significant increases, while HDFC Bank, Indian Bank, and others may show a flat trend. Conversely, State Bank of India, Axis Bank, and ICICI Bank are likely to record a decline in provisions. Some banks may benefit from favorable changes in their loan mix.
For private sector banks, the Weighted Average Domestic Term Deposit Rate (WADTDR) fell slightly, while the Weighted Average Lending Rate (WALR) increased. Public sector banks saw a slight increase in WADTDR and a minor decline in WALR, leading to a narrowing loan spread. Overall, NIM is expected to be marginally lower for some banks.
Loan growth is projected to be healthy, with IDFC First Bank and CSB Bank likely to see growth exceeding 4.5%. Moderate growth is expected for banks like HDFC Bank, BOB, and SBI. Operational expenses for both private and public sector banks are anticipated to grow at a slower pace than business growth. Long-term bond yields have decreased, with the average 10-year yield at 6.88% during the quarter.
Doubts Revealed
Q2FY25 -: Q2FY25 refers to the second quarter of the financial year 2024-2025. In India, the financial year starts on April 1st and ends on March 31st of the next year. So, Q2FY25 would be from July to September 2024.
Net interest margins -: Net interest margins are the difference between the interest banks earn from loans and the interest they pay on deposits. It’s a measure of how profitable a bank is from its lending activities.
Deposit costs -: Deposit costs are the interest rates that banks pay to customers who keep their money in savings accounts or fixed deposits. When these costs rise, banks have to pay more to their customers.
Asset quality -: Asset quality refers to how safe and reliable a bank’s loans and investments are. If asset quality is stable, it means the bank’s loans are being repaid on time and there are fewer bad loans.
Slippage levels -: Slippage levels indicate the amount of loans that have turned bad or are not being repaid on time. Similar slippage levels mean that the number of bad loans hasn’t changed much from the previous quarter.
Provisions -: Provisions are funds that banks set aside to cover potential losses from bad loans. If a bank increases its provisions, it means they are preparing for more loans to go bad.
Bond yields -: Bond yields are the returns investors get from bonds. When bond yields decrease, it means the interest rates on bonds are lower, which can affect how much banks earn from their investments.