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Banking profitability moderate on deposit challenge

August 04, 2023

Banking profitability moderate on deposit challenge
With intense competition for deposits among Indian banks, the return on assets (ROAs) is expected to moderate from 1.1 per cent in FY23 to 0.8-1.0 per cent in 24-30 months, said a Mckinsey update on the banking sector.

Peeyush Dalmia, senior partner, banking practice in India, Mckinsey, said while banking ROAs have been healthy, multiple trends could exert downward pressure on profitability over three-five years.
 
The slower deposit growth, increasing proportion of credit-tested customers, fee income decline and rising operational expenses may impact ROAs.  
 
The structural re-allocation of savings away from deposit products may lead to muted growth in deposits. The high inflation combined with slow growth in deposits is expected to keep upward bias on rates.
 
According to Reserve Bank of India’s (RBI’s) analysis, the weighted average domestic term deposit rates (WADTDR) on fresh rupee deposits increased from 4.21 per cent in May 2022 to 6.34 per cent in June 2023.
 
Also, the gap between the growth rate for advances and deposits has been significant. While advances grew 20.2 per cent year-on-year (YoY), deposits grew by 13.2 per cent as on July 14, 2023, according to RBI data.  
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