Banks may end FY24 with NIM at the same level as FY23

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Banks could end FY24 with almost the same net interest margin (NIM) as in FY23 as term deposits are expected to get re-priced over the next couple of quarters.

NIMs of Scheduled Commercial Banks’ had improved 30 basis points through FY23 to 3.7 per cent as at March-end 2023 as transmission of monetary policy tightening to deposit rates lagged the pass-through to lending rates, per the latest Financial Stability Report.

However, going forward, NIM is likely to moderate as term deposits get repriced higher even as lending rates remain steady in the backdrop of the monetary policy committee leaving the policy repo rate unchanged at 6.50 per cent its last two meetings, say bankers.

NIM, which is an indicator of the efficiency of intermediation, is the net interest income (interest earned less interest expended) divided by average interest earning assets.

CARE Ratings attributed the enhancement in Banks’ NIM in the fourth quarter of FY23 to 3.3 per cent from 2.84 per cent in the year ago period to faster repricing of loans even as deposit rates have not yet reflected the increased interest rates.

The anticipated rise in deposit costs, which is expected to be with a lag, is likely to be counterbalanced by the withdrawal of ₹2,000 denomination banknotes, it added.

In a recent media interaction, Sandeep Batra, Executive Director, ICICI Bank, said: “Term deposit rates have increased significantly over the last six to nine months… So, the sequential decline in NIM (to 4.78 per cent from 4.90 per cent) reflects the lagged impact of re-pricing of deposits, which is partly offset by increase in yields on loans and investments.

“We do expect re-pricing of deposits over the next couple of quarters. The overall decline in NIM is in line with our expectations. Going forward, we do expect some moderation in NIM to continue…”

The Bank could end FY24 with a NIM of 4.50 per cent, similar to the FY23 level, Batra said.

In a recent analyst call, MV Rao, MD & CEO, Central Bank of India, underscored that the deposit rate effect (of repo rate changes) comes with a lag.

But the Bank’s NIM will continue to be above the floor level of 3 per cent. The Bank’s NIM improved to 3.62 per cent in Q1FY24 from 2.88 per cent in Q1FY23.