Banks under pressure, margins at risk: Best Banks survey reveals top performers thriving amid turmoil

This is the high-stakes environment in which banks and non-banking financial companies or NBFCs often operate as cycles turn, where navigating a delicate balance between growth, cost efficiency, and customer service becomes the key differentiator. There are some players that have not only endured these headwinds but have excelled. The BT-KPMG Survey of India’s Best Banks and NBFCs for 2023-24 shines a spotlight on these stars of resilience and innovation, celebrating their ability to redefine excellence in the face of adversity. (See graphic ‘Celebrating the Champions’).

The Challenge Of Liabilities

There has been sluggish momentum in mobilising deposits by banks—and this has been a result of multiple challenges. These include a slowdown in the economy (the RBI has projected a lower GDP of 6.6% in FY25); delayed government spending during elections; and other liquidity challenges in the economy. The buoyancy in the stock markets after the pandemic has also attracted young savers to equity and mutual funds because of higher returns, further aggravating banks’ struggles in mobilising deposits.

Naveen Kulkarni, Chief Investment Officer at Axis Securities PMS, says banks have sharpened their focus on deposit accretion to support the credit growth buoyancy. “In the quarter gone by, the pace of deposit growth has improved, with growth led by both CASA and term deposits (TDS). We believe banks will continue to focus on deposit mobilisation and eventually credit and deposit growth will align,” he explains.

Akshay Gupta, Managing Director & CEO of Prime Research & Advisory, doesn’t believe that there is any structural challenge for banks to mobilise deposits. He explains that banks have headway to increase deposit rates, if required, as the rates have lagged the 250-bps hike in repo rate—the rate at which the central bank lends money to commercial banks. While it may seem that bank deposits are currently less favoured compared to other asset classes, specifically equity mutual funds that grow at faster rates, “equity mutual funds and bank deposits are not comparable as both cater to different needs, time horizons and risk appetites”, says Gupta.

Former SBI Chairman Dinesh Kumar Khara, who is the winner of this year’s Lifetime Achievement Award, has a different take. “When it comes to deposits, it’s not that deposits aren’t available—they are, but at a price. This is tied to the choices depositors make. Some prefer safer options with no risk, while others are willing to take risks and allocate their savings to market-linked products,” he explains.

Asset-side Challenges

In November 2023, RBI decided to curb the growth in unsecured lending, especially personal loans and credit cards, by increasing the capital requirement. It also restricted the capital flow from banks to NBFCs. As the high growth in riskier unsecured loans slowed down subsequently, then RBI Governor Shaktikanta Das mentioned that the central bank’s endeavour was to smell a crisis early and act on it. “...not taking any action on the unsecured lending front would have created bigger problems,” Das had said.

The stress in the microfinance (MFI) portfolio has also been visible across lenders that have considerable exposure to the segment, be it NBFC-MFIs, small finance banks (SFBs) or larger banks. This is partly attributed to a K-shaped recovery in the economy and probably liberal underwriting by some lenders. In fact, SFBs are the worst affected even as they are diversifying their books to include more secured loans. Kulkarni of Axis Securities PMS says the stress is not just from the MFI portfolio.

“It is visible in other unsecured portfolios such as credit cards and personal loans. However, the asset quality in other secured segments and corporate portfolios continues to hold up well,” Kulkarni says.

Gupta of Prime Research & Advisory says the impact is also on select full-scale banks, apart from SFBs and NBFC-MFIs. “The impact appears limited to the micro part of the MSME portfolio; small and medium enterprises are better off,” he explains.

The Impact On Returns

Generally for banks, it has always been the changes on the assets side that have impacted returns, because of underwriting of bad credit. But this time around, the liabilities side challenges have also started erupting, which is building pressure on NIMs. Will the deposit challenge and stress in select portfolios affect the banking sector’s NIMs?

“My sense is that because it’s a highly competitive space, nobody could be permitted to have super normal profits, which means that the NIMs will be range-bound,” says Khara. (Read a detailed story on the former SBI chairman, who has won the Lifetime Achievement Award this year, on page 38).

“We believe margins for banks, ex-SFBs are likely to have largely bottomed-out and should stabilise hereon, with Cost of Funds (CoF) having peaked out. We expect slippages from the troubled segments to continue to remain elevated in H2; however, the impact on NIMs may not be very significant,” says Kulkarni of Axis Securities PMS.

He, however, believes that for SFBs, NIM compression will continue primarily on the back of a shift in the portfolio mix towards secured products and from elevated slippages from the MFI portfolio.

“The deposit challenge not being structural, we do not feel there is an imminent impact on NIMs of the banking sector. Having said that, banks that are innovative and efficient will be able to deliver better in the event of compression of NIMs,” says Gupta of Prime Research & Advisory.

The Digitisation Risk

The surge in digitisation volumes, digital journeys for personal, auto and home loans, and API integrations with hundreds of fintechs bring with them a host of risks like cybersecurity threats, data breaches and hacking. “Now, with more and more things moving to the digital platform, your risks also increase because the entire risk landscape is shifting to digital operations, with IT-related risks. It’s a reality. So, you have to invest in the technology side of it,” says an RBI official who declined to be named.

“The dependence created by the use of third-party APIs can lead to other risks such as system vulnerabilities, outages, and deterrence from the service levels agreed upon. Also, increased anxiety over consumer privacy coincides with increased data sharing, which can be misused or abused directly,” says Shams Tabrej, CEO of fintech firm Ezeepay.

“Cybersecurity is a shared responsibility. Banks must protect systems, educate customers, and continuously upgrade protocols to stay ahead of cybercriminals. However, customers also play a critical role by safeguarding their credentials against evolving social engineering tactics,” says Khara.

Tashwinder Singh, CEO and MD of Niyogin Fintech Limited, says a significant concern is the potential for widespread system failures due to overreliance on interconnected digital systems and third-party APIs, where a single vulnerability could cripple multiple services.

“As innovation surges ahead, regulatory frameworks struggle to keep pace, leaving consumers vulnerable in many sectors,” says Singh.

Clearly, the banks have to be on guard in the current challenging and dynamic operating environment. In the pages that follow, read about some of the banks and NBFCs that have managed to do well despite the challenges.

@anandadhikari