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Banking sector margins are expected to remain under pressure due to strong loan growth and rising deposit costs, with mid-sized lenders likely to be more affected. According to recent industry data reported in the past week, net interest margins (NIMs) remained flat or declined marginally in the March quarter as competition for deposits intensified. Deposit growth has lagged credit expansion, prompting banks to raise interest rates on term deposits and rely on higher-cost funding sources. While retail loan demand continues to support credit growth, analysts indicated that margin compression could persist in the near term, particularly for lenders with higher reliance on bulk deposits and limited low-cost current and savings account (CASA) bases.
Margins of banks, particularly mid-sized lenders, are expected to remain under pressure as rising funding costs and sustained credit growth weigh on profitability, according to industry data and analyst commentary reviewed in the past week. Advertisement
During the March quarter, net interest margins (NIMs) across banks remained largely stable or declined slightly, reflecting the impact of increasing deposit costs. The trend has been more pronounced among mid-sized lenders, which typically have a higher dependence on term deposits and wholesale funding compared to larger banks with stronger current and savings account (CASA) franchises.
The primary driver of margin pressure has been the divergence between credit and deposit growth. While loan growth has remained strong, deposit mobilisation has not kept pace, resulting in tighter liquidity conditions. As a result, banks have increased interest rates on term deposits to attract funds, leading to higher cost of funds.
Data indicated that outstanding loan growth continued to exceed deposit growth during the quarter, contributing to the need for more aggressive deposit pricing. Banks have also relied on bulk deposits and certificates of deposit to bridge funding gaps, which typically come at higher costs compared to retail deposits.
Analysts noted that retail lending, including segments such as housing, personal loans, and vehicle finance, has continued to drive overall credit growth. However, the yields on these portfolios may not fully offset the rising cost of funds, particularly as competition intensifies across lending segments.
In addition to deposit cost pressures, banks are also facing increased operating expenses, including technology investments and branch expansion, which further impact profitability metrics. The combined effect of higher funding costs and operating expenses is expected to limit margin expansion in the near term.
Some large banks with a higher proportion of low-cost CASA deposits have been relatively better positioned to manage margin pressures. In contrast, mid-sized banks, which rely more heavily on term deposits, are likely to see greater impact on their margins.
Industry analysts indicated that margin trends in the coming quarters will depend on the trajectory of deposit growth, interest rate movements, and competitive dynamics within the banking sector. A sustained imbalance between credit and deposit growth could continue to exert pressure on margins.
Banks have also been focusing on improving asset quality and managing credit costs to support overall profitability, as margin pressures persist. Additionally, lenders are exploring strategies such as repricing loan portfolios and diversifying funding sources to mitigate the impact of rising costs.
The outlook suggests that while credit demand remains strong, maintaining profitability will depend on banks’ ability to manage funding costs and optimise their deposit mix in a competitive environment.
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