Banks' margins slip to lowest in 3 years on rate cut impact

ET Intelligence Group: The average net interest margin (NIM) for the banking sector hit a three-year low in the June quarter amid squeezed profits. For a sample of 37 banks including 12 public sector banks, 21 private sector banks and four small finance banks, average NIM was 3.98% in the June quarter. The previous low was 3.82% in the March 2022 quarter. Since February, the Reserve Bank of India (RBI) has reduced the repo rate by 100 basis points, bringing down lending rates. Deposit costs, however, have adjusted more slowly, eroding banks' margins.

"Most banks have their lending linked to external benchmarks. Therefore, after the repo cuts since February, their assets (advances) have repriced faster than liabilities (deposits)," Kaitav Shah, lead BFSI analyst, Anand Rathi Institutional Equities, told ET.

He expects the pressure on the margins to stay in the September quarter as well since a significant portion of the rate cut impact was not fully passed through in the June quarter.


According to India Ratings and Research, nearly 61% of loans are linked to external benchmarks. As a result, lending rates reset immediately after a repo cut while deposits are repriced with a lag.

Analysts expect an uptick in NIMs in the second half of FY26. "Once deposit rates fall, we should be able to see sequential improvement in NIMs, provided the RBI does not cut rates further," said Shah.

The decline in NIM is seen across the banking sector banks in both categories-public and private sector-witnessing a sharp decline in NIMs over the past three years.