Indian banks’ profits dragged by rising costs and tightening money supply

Deposit growth and credit growth will slow, impacting banks’ margins.

India-based banks’ return on total assets (ROTA) will decline slightly in FY2025 on the back of increasing cost of funds, elevated cost-to-income ratios, and a lag on deposit growth, reports CareEdge.

Currently, banks continue to benefit from high interest rates. However, the Reserve Bank of India (RBI) set to remove its accommodative stance will lead to a tightening of money supply in the economy and a lag in deposit growth.

With this, the cost of funding is expected to increase, and in turn impact NIMs beginning Q3 FY2024 and will keep the margin under pressure for the next 2 to 3 quarters, CareEdge warned.

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Banks’ heavy investment in technology and branch expansion have also led to an increase in employee expenses.

Indian lenders reported strong profitability in FY2023 thanks to surplus liquidity generated through deposits and lower costs during the COVID period, reports CareEdge. Banks utilised this to fund credit growth, which in turn improved their net interest margins (NIM).

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