Borrowing at 9% and offering home loans at 8.5%. Uday Kotak, founder of Kotak Mahindra Bank,  has highlighted this grim reality as deposit crunch has hit the banking sector.

Kotak, Asia’s richest banker, has cautioned of the challenges Indian banks face in their business model if the deposit tightness persists.

The problem at hand, according to Kotak, is the muted growth of low-cost retail deposits across the system, which is leading to lending at negative margins as banks are taking refuge in expensive bulk deposits.

Kotak raised concerns about the sustainability of the banking model. "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," Kotak said in a post on X.

The problem arises because low-cost retail deposits (CASA, non wholesale) has shown muted growth. Yet, despite sourcing high-cost deposits, banks are issuing home loans at 8.5% floating rate. 

“Borrow at 9% and lend at 8.5! -0.5% spread. And repo rates likely to drop,” Kotak said.

Kotak raised concerns about operational expenses and credit costs in this scenario: "What about the opex/ credit costs? If the deposit tightness persists it is a challenge to the banking business model," he cautioned.

Banks will face growing pressure on margins if borrowing costs exceed their lending rates. The sustainability of this model will come under cloud unless the issue is addressed.

Added to these woes are the rising stress in the unsecured and microfinance portfolios.