RBI chief flagged banks' margin stress, and they see it continuing
Mumbai: While lauding the robust health of India's banking system, Reserve Bank of India Governor Sanjay Malhotra had last week flagged a decline in the
Mumbai: While lauding the robust health of India's banking system, Reserve Bank of India Governor Sanjay Malhotra had last week flagged a decline in the sector's margins for the one year period ended June 2026, and lenders see little respite just yet. India's banking system net interest margin (NIM) was at 3.21% in June 2026, as against 3.26% a year ago, as per data by the central bank. While some expect the margins to stabilize after the June quarter squeeze, others see more pressure ahead, as deposit costs remain high and strong credit growth keeps the race for funds intense. Margins are also seen under pressure from flows under the foreign currency non-resident FCNR(B) deposit scheme. Also Read | How RBI handles 22,000 regulatory applications each month “We believe this is a cycle bottom as far as NIMs are concerned. So, we are hopeful that from here on you will see the NIMs journey moving in the right direction,” Axis Bank’s chief financial officer Puneet Sharma said in the Q1 earnings call on 18 July. The private sector lender’s NIM has been consistently shrinking, falling to 3.46% during the reporting quarter from 3.62% in the previous quarter and 3.80% a year ago. Other lenders such as Bank of Baroda and IndusInd Bank highlighted that the persistently high pace of credit growth as compared to the increase in deposits is likely to continue to put pressure on deposit mobilization, and subsequently margins.
What also weighed on margins was a pick-up in lower-yielding corporate loans, as against high yielding retail loans during the quarter. While these banks are hopeful that a pick-up in retail loans over the coming quarters will help normalize margins, going ahead, most lenders refused to share a guidance on the margin trajectory, citing uncertainty due to several macroeconomic factors and expectations of elevated operating expenses. In a 4 August note, CareEdge Ratings said that while the rise in operating expenses of banks was “contained” at 3.9% in Q1 FY27, the restraint looks temporary, with banks committed to branch expansion, specialist hiring and technology spending through the year. “Pre-provisioning operation profit (PPOP) growth is expected to slow down from current levels. Future margin improvement will depend on whether lower funding costs also benefit the larger private banks,” it said, adding that even public sector banks posted better interest income largely owing to growth in their other income and investment portfolio, instead of better margins. ICICI Bank, which posted an increase in margins both sequentially and on year, was less optimistic. It said margins are likely to be range-bound through the current fiscal year. Executive director Sandeep Batra attributed the improvement in margins during the quarter to income tax refunds and repricing of some bulk term deposits.
The BriefWire