Uday Kotak flags critical banking risk: 'Borrow at 9% and lend at 8.5!'

Top Indian banks face a troubling paradox — borrowing deposits at nearly 9% but lending at only 8.5%. Top banker and business leader Uday Kotak highlighted this discrepancy in a post on X, directly questioning the sustainability of the banking model amid these inverted margins.

Kotak outlined the critical challenge banks currently face: "Leading banks are taking 1 year wholesale deposits at ~8%. Translates to loaded marginal deposit cost of 9%+ after CRR (0 interest), SLR, deposit insurance, priority sector. Excluding opex." 

He underscored the contradiction, pointing out that despite these high deposit costs, "banks are issuing home loans at 8.5% floating rate. Borrow at 9% and lend at 8.5! -0.5% spread."

Highlighting further concerns, Kotak asked rhetorically about operational expenses and credit costs amid this scenario: "What about the opex/ credit costs? If the deposit tightness persists it is a challenge to the banking business model."

Kotak's critique comes at a critical juncture for Indian banks, which have experienced significant loan growth moderation recently. According to RBI data, credit growth slowed to just 12% year-on-year in February, compared to 16.6% the previous year, excluding the HDFC merger impact. The slowdown is attributed primarily to stricter lending norms imposed by RBI late in 2023, aimed at reducing risks associated with personal loans and credit card debt.

The stringent rules led to a sharp decline in personal loan growth—from 19.5% a year earlier down to 8.4%—while credit card debt growth dropped from 31% to just 11.2%. Lending to non-banking financial companies (NBFCs) also reduced, significantly impacting overall credit availability and economic liquidity.

Although the RBI recently relaxed some of these capital requirements under Governor Sanjay Malhotra, analysts expect the benefits to take several months to materialize. Meanwhile, Kotak's concerns remain pressing. If banks continue borrowing at costs exceeding their lending rates, the banking sector faces growing pressure on margins, raising serious sustainability questions that institutions will need to urgently address.