Uday Kotak Warns Of Crisis, Says Banks Borrowing At 9%, Lending At 8.5%

Seasoned banker Uday Kotak has raised an important concern over India's banking industry—banks are charging more to borrow funds than they are receiving from lending them. 

He mentioned that some leading banks are accepting wholesale deposits at around 8 per cent, but due to other fees, the actual borrowing rate is in excess of 9 per cent. Meanwhile, these banks are advancing home loans at merely 8.5 per cent, which represents a negative margin of minus 0.5 per cent.

Kotak laid out his concerns in a post on social media platform X (formerly Twitter).

He wrote: “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 said banks are not only experiencing tight profits but could also be hurt by operational costs and credit costs.

Banking Sector Faces Multiple Pressures

Kotak’s warning comes in the wake of muted loan growth plaguing the Indian banking sector. 

Reserve Bank of India (RBI) statistics reveal that the overall credit growth in February 2024 fell to 12 per cent year-on-year (y-o-y), down from 16.6 per cent in the corresponding period last year. This is mainly due to tighter lending rules by the RBI in the latter half of 2023 to curb risks in credit card loans and personal loans.

These stricter rules had a dramatic impact—expansion in personal loans, which fell from 19.5 per cent to as low as 8.4 per cent in the past year, while credit card borrowing growth collapsed from 31 per cent to 11.2 per cent. Lending to non-banking financial companies (NBFCs) also slowed, affecting availability of credit in all the sectors.

Though the RBI, headed at present by Governor Sanjay Malhotra, has just eased some capital standards recently, industry professionals believe that some time will be required before banks start feeling relief of any kind. It continues to hold true, however, for banking margins for which Kotak had expressed concerns. As deposit rates continue on the rise while lending rates are constant, banks would be under stress in sustaining profitability, thus could opt for deeper lending cuts or increase interest charges on loans.

The banking sector now faces the tough balancing act. If deposit rates remain elevated and lending continues to be constrained, banks could potentially be forced to seek new avenues of protection of their earnings. This might include reducing the costs of doing business, loan pricing to the consumer, or relying more heavily on fee-based revenue.

Kotak's observation highlights the urgency for banks and regulators to act quickly to fill these gaps before they lead to more severe financial strain. Banks will have to transform either through policy changes or strategic realignments in order to survive in the long run.