Fitch expects bank NIMs to compress in FY24

In a rather interesting note, Fitch has underlined that net interest margin (NIM) of Indian banks could be under pressure in FY24. This year has been has been a virtual celebration for banks as the hike in deposit rates did not keep pace with the hike in lending rates. This lag effect was the reason for bumper profits of banks in FY23, but that should gradually narrow and constrict NIMs in FY24.

However, Fitch does not expect the impact to be too huge. The banking sector average NIM is expected to contract by 10 bps to 3.45% in FY24. This comes on the back of a 15 bps spike in NIMs in FY23. More importantly, even at 3.45%, the net interest margins (NIMs) of the banking sector would be a good 35 bps above the average NIM between FY17 and FY22. 

ICRA has pointed out that some of this impact would be offset since RBI is expected to further hike rates from here. Even in FY24, the banks get benefit of the lag effect, wherein loan rates go up faster than deposit rates on the incremental loans. One risk Fitch has pointed out is that banks may be forced to hike deposit rates faster or rely on expensive wholesale funding.

If we look back, the expansion in bank NIMs from 2.9% in FY19 to 3.5% in FY23 has been largely on account of a decline in funding costs. This was driven by a sustained period of low credit demand and high liquidity. Also, banks focused more on the higher-yielding segments, like unsecured personal loans, credit cards and consumer durable loans which also helped matters. However, this is unlikely to impact profitability of banks in FY24, according to Fitch.