Banks profitability up: increase in net interest margin

Banks profitability up: increase in net interest margin

Subject: Economy

Section: Monetary policy

Context: Net interest margin (NIM) of banks, a key profitability gauge, grew 46 basis points (bps) or .46 % to 3.3 % in the January-March quarter, driven by slower deposit rate resetting

Key Points:

• Banks have benefited in terms of their interest income, owing to the increased interest rates that have been passed on to borrowers, but without a simultaneous passing on of the enhanced rates to the depositors.
• Since May 2022, the RBI has increased the repo rate by 250 bps to 6.5 % in FY23, which was accompanied by an increase in interest rates in the debt market.
  • Banks in turn readjusted their interest rates and that has been reflected in lending rates.
  • However, the rate hike is not fully reflected in deposit rates which are not reset before maturity. Thus the effect of increased deposit rates acts with a lag.
  • The overall effect is an increase in Net interest margin. NIM = Interest on loan – interest on deposits
  • NIM saw an on-year improvement of 46 bps to 3.3 % in Q4FY23 due to the faster repricing of loans, while deposit rates have not yet reflected the increased interest rates.
• This has helped lenders register a 29.5 % increase in their net interest income during the period.
  • Net interest income or NII, is the money that banks earn from lending and paying to depositors. Growth in NII = Growth in NIM x Growth in Advances
  • High yields on advances/loans, along with healthy growth of loan book, helped NII to rise to ₹1.83 lakh crore in Q4FY23.
• It can be summarized that while both cost of funds (deposit rates) and lending rate (rate bank is charging on advances) increased, overall balance determines the effect on net interest margin.