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Care Ratings in its latest report has said that banks' net interest margin (NIM), a key profitability gauge, grew 46 basis points (bps) to 3.3 per cent in the January-March quarter (Q4FY23), driven by slower deposit rate resetting. This has helped lenders register a 29.5 per cent increase in their net interest income during the period. Net interest income (NII), which is the money that banks earn from lending and paying to depositors, rose to Rs 1.83 lakh crore in Q4FY23 due to healthy loan growth and a higher yield on advances as against the year-ago period.

According to the report, the NIM saw an on-year improvement of 46 bps to 3.3 per cent in the fourth quarter due to the faster repricing of loans, while deposit rates have not yet reflected the increased interest rates. The anticipated rise in deposit rates, which is expected to be a lag effect, is likely to be counterbalanced by the withdrawal of the Rs 2,000 banknotes in May this year. The NIM of private sector lenders stood at 4.03 per cent, which was more than 43 bps, and that of public sector lenders at 2.85 per cent, up 46 bps.

The report said despite rising interest rates on loans, the overall economic growth led to higher credit demand leading to banks reporting a robust 17.3 per cent rise in advances mainly driven by personal loans, NBFCs, and MSMEs, taking the full year credit offtake to 15 per cent in FY23. Significantly, private sector banks as well as public sector ones logged in equal pace of loan growth during the reporting period. But public sector banks reported a higher NII growth of 31.6 per cent against 28.2 per cent rise recorded by their private sector peers.

On the other hand, it said interest income rose 32.1 per cent overall led by private sector lenders which reported a 32.6 per cent growth. Their state-owned peers registered a 31.7 per cent growth in the interest income during the quarter. This was based on an increase in advances by 17.3 per cent and 130 bps higher yields from 7.5 per cent in Q4FY22 to 8.8 per cent in Q4FY23. Interest expenses rose by 34.3 per cent with private banks witnessing a 37.5 per cent growth and the state-owned lenders registering a much lower 32.6 per cent hike. It rose due to higher deposit rates triggered by RBI's monetary policy tightening which also led to an increase in the cost of funds by 77 bps.