Mumbai: Banks are offering home loans at a floating rate of 8.5 per cent, while borrowing at rates upwards of 9 per cent (after accounting for regulatory costs like the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)). This results in a negative lending spread, where the cost of borrowing exceeds the interest income from lending. This situation is unsustainable in the long run, as banks cannot afford to continue operating with such negative margins.
A key factor contributing to this issue is the tightness in deposit growth, particularly in low-cost retail deposits (CASA). Banks are heavily reliant on expensive wholesale deposits, which add significant pressure on their profit margins. With muted growth in CASA deposits, banks are struggling to maintain a balance between deposit acquisition and lending profitability.
Despite falling repo rates, which typically ease borrowing costs, banks continue to face escalating operational expenses and credit costs. This adds another layer of difficulty as they attempt to maintain profitability while managing the increased cost of borrowing and lending.
The overall banking business model is under severe strain. As margins tighten further, banks will need to make tough decisions regarding their lending practices or revise their deposit strategies. This could lead to tighter lending conditions or even a more aggressive push for low-cost deposit growth, which could put more pressure on the broader economy.
This situation underscores the delicate balance banks must maintain between attracting deposits, managing lending rates, and covering operational costs. Without addressing the issue of tight deposits and negative lending spreads, banks may face long-term sustainability challenges.
