“Borrowing 9 % and subscribing to 8.5!” The critical banking risks comment: “Borrowing by 9 % and subscribing to 8.5!”

The best Indian banks face a disturbing paradox – borrowing deposits by about 9 % but only 8.5 %. The most prominent banker and business leader Uday Kotak this contradiction in a post on X, directly questioning the sustainability of the banking model amid these inverted margins.

“The leading banks take almost a year for approximately 8 %. Translates to the cost of the marginal deposit loaded by 9 %+ after CR (0 interest), SLR, deposit insurance, priority sector. With the exception of Opex.”

He emphasized the contradiction, noting that despite these high deposit costs, “banks make home loans at a floating rate of 8.5 %. Borrowing by 9 % and lend to 8.5! -0.5 %.”

With the highlight of more concerns, Kotak asked with a letter about operating expenditures and credit costs amid this scenario: “What about Opex/ credit costs?

Kotak’s criticism comes at a critical turn of Indian banks, which has witnessed a great moderate in the growth of loans recently. According to RBI data, credit growth slowed to 12 % on only annual basis in February, compared to 16.6 % in the previous year, with the exception of the HDFC integration effect. The slowdown in the first place is the most striking rules of lending that RBI imposes in late 2023, which aims to reduce the risk associated with personal loans and credit card debts.

Strict rules led to a sharp decrease in personal loan growth – from 19.5 % in the previous year to 8.4 % – while credit card debt growth decreased from 31 % to only 11.2 %. Likewise, NBFCs has been reduced, which greatly affects the availability of total credit and economic liquidity.

Although RBI has recently set some capital requirements under the leadership of Governor Sanjay Malhotra, analysts expect the benefits to take several months. Meanwhile, Kotak’s fears are still urgent. If the banks continue to borrow at costs that exceed their lending rates, the banking sector faces increasing pressure on the margins, which raises serious sustainability questions that institutions will need to address them urgently.