The RoA of the banking system, a metric reflecting profitability relative to assets, is witnessing a positive trajectory in recent years, rising from -0.2% in FY18 and 0.9% in FY22 to 1.1% in FY23. “If we take a 12-18 month view, we expect RoAs to fall,” said Peeyush Dalmia, senior partner, McKinsey. The quarterly results of all banks and their projections hint at a pressure on net interest margins (NIMs) going forward, he added.

This automatically translates into RoA, and will be very difficult for other factors to compensate for the drop in NIMs, Dalmia said.

RoAs, on an average, was 1% in FY13, dipped to -0.2%, and is up again to 1.1%, he said. “We are at a 10-year high in profitability, as far as banking is concerned,” Dalmia added.

NIMs are at historical highs as retail loans have grown faster, Dalmia said, adding that the share of retail loan in total banking advances has gone up quite significantly and corporate loans grew the slowest. “Retail gives you the maximum amount of NIM,” he added.

That apart, even after rates moved up, cost of deposits did not go up at the same rate, but lenders passed on the new rate to borrowers.

Dalmia said this was primarily because 70-75% of the lending today is on floating rates and the transmission of rates to borrowers happens much faster than the deposits.

Historically, 30-40% of the loans were floating rate. “This is also a factor why we think we will see a compression as we go forward as the lag in deposit costs catches up.”

McKinsey said over the past five years and the recent global banking turmoil, Indian banks have remained strong and outperformed their global peers on growth and profitability.

A large portion of the banking system remains profitable, primarily driven by strong growth in the retail and micro, small, and medium enterprises (MSME) lending segments, it said. Consolidation across public sector banks (PSBs), the report said, has also yielded larger, healthier institutions.

Updated: 02 Aug 2023, 11:32 PM IST