Impact of risk weights to be higher on private banks, least on SFBs
The impact of higher risk weights will be seen the most in private banks due to their higher exposure to unsecured loans, and the least on small finance banks, owing to a higher share of their portfolio being eligible under priority sector lending.
“The impact of the regulations on the overall capital adequacy of the banking sector is likely to be moderate, in the range of 30-70 bps for the public sector banks and 30-100 bps for private sector banks. This is in addition to the additional capital requirements for banks under the proposed change from accounting for losses under IRAC norms to the ECL method,” CARE Ratings said in a note.
The impact on small finance banks, which are mandated to have at least 75 per cent of their loans disbursed under priority sector lending, is estimated to be much lower at 10-50 bps, it said.
PSU and private banks are required to maintain a minimum capital adequacy ratio of 11.5 per cent, whereas it is higher at 15 per cent for small finance banks. The median CAR for PSU banks stood at 16.4 per cent and for private banks at 17.9 per cent, indicating a buffer of 4.9 per cent and 6.4 per cent, respectively, over and above the minimum regulatory requirement. Small finance banks maintained an average buffer of 5 per cent.
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Meanwhile, bank credit grew at a robust 20 per cent in Q2FY24, whereas deposit growth was 13.5 per cent. Further, CASA growth remained lethargic across the industry, contributing to a sequential rise in funding costs.
The expansion in the cost of funds by 101 bps y-o-y can be attributed to a rise in deposit rates, along with a reduction in the CASA ratio (low-cost funds), it said, adding that interest income for banks rose 33.5 per cent in Q2 FY24.
“The competition for deposits is likely to intensify further. Hence, the NIM trajectory is expected to remain stressed and moderate even further in the later part of FY24, as competition would cap interest rates charged at a certain level,” CARE said.
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Private banks’ deposits rose by 17.4 per cent y-o-y, whereas those for PSU banks rose 9.6 per cent. The Credit and Deposit (C/D) ratio stood at 79 per cent as of September 2023, expanding by 400 bps y-o-y due to widening credit-deposit growth and impact of HDFC’s merger with HDFC Bank.
Bank NIMs contracted 14 bps sequentially to 3.13 per cent, but reported an increase of 4 bps on year, CARE said, adding that slower incremental growth in unsecured loans due to higher risk weights will impact both credit growth and NIMs (net interest margins).