Private banks' margins fall as FCNR deposits raise funding costs
In the second quarter, leading private sector banks in India reported a drop in net interest margins. This decline was primarily caused by the costs associated with foreign currency non-resident deposits. Analysts noted that the leveraged nature of these deposits significantly impacted profitability. Additionally, banks faced pressure from faster repricing of assets as interest rates declined.
Mumbai: Private sector banks experienced a year-over-year decline in net interest margins (NIMs) during the second quarter, as the expenses associated with foreign currency non-resident (bank) deposits and low-margin lending backed by these funds impacted profitability. NIM, the difference between interest earned on loans and interest paid for deposits, serves as a crucial profit indicator for banks.
ICICI Bank, HDFC Bank, and Axis Bank all reported a decrease in NIMs compared to the previous year, despite other profitability indicators remaining stable. Analysts attributed the margin drop to the consequences of FCNR (B) deposits. These banks faced challenges on both deposit costs and reduced margins on leveraged lending. The substantial FCNR (B) deposits, a portion of which amounted to $10.62 billion for Axis Bank, resulted in a 34-basis-point impact on NIMs, falling from 3.80% to 3.46% in September.
For ICICI Bank, the NIM decline was particularly pronounced at 12 basis points, with NIMs decreasing from 4.30% to 4.18%. Executives from the banks noted that the full impact of FCNR (B) deposits had not yet materialized, and the margin challenges might persist as the declining interest rate cycle continues.
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