Uday Kotak’s big warning puts spotlight on banks’ NIM squeeze

Indian banks are facing an unusual and potentially unsustainable financial paradox, according to top banker Uday Kotak, who has raised concerns over banks borrowing at higher rates than they lend—a situation that could challenge the traditional banking model if it persists.

In a recent post on X (formerly Twitter), Kotak, Founder and Director of Kotak Mahindra Bank, noted that “leading banks are taking 1-year wholesale deposits at ~8%,” which translates to a loaded marginal cost of over 9% once statutory and regulatory obligations such as the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), deposit insurance, and priority sector lending are accounted for.

Kotak’s concerns come at a time when both deposit and credit growth are showing signs of deceleration. According to CareEdge’s recent update, bank credit grew by 11.1% year-on-year as of March 7, slowing from 12.1% the previous year (adjusted for merger effects). Deposits grew by 10.2%, also slightly down from 10.5% last year.

Despite offering elevated term deposit rates, banks are struggling to attract sufficient inflows, forcing them to raise funds through high-cost instruments like Certificates of Deposit (CDs), which surged by 34% YoY to ₹10.58 lakh crore. Yields on CDs have also edged higher, reflecting banks’ growing funding needs amid tight liquidity.

CareEdge’s report notes that the credit-deposit (CD) ratio remains elevated at 80.5%, reinforcing concerns about the pressure on balance sheets.

Similarly, brokerage firm Elara Securities has echoed these concerns, noting that the start of a shallow rate cut cycle by the Reserve Bank of India (RBI) would put further strain on net interest margins (NIMs). Their analysis suggests large private banks could see a 15–17 basis point compression in NIMs, with similar or greater impact expected for public sector banks.

In response to ongoing liquidity challenges, the RBI has postponed the implementation of key regulatory measures, including new liquidity coverage ratio (LCR) norms and expected credit loss (ECL) frameworks. Elara noted that these delays provide short-term relief, especially for mid-sized and public sector banks that would have borne the brunt of immediate implementation.

Analysts warn that unless banks can meaningfully grow their low-cost CASA (Current Account, Savings Account) base or reprice their loan books to reflect the higher cost of capital, profitability could come under significant pressure.