MUMBAI: Net interest margins (NIM) for lenders, particularly those privately owned, could shrink as most loans tied to the policy benchmark get repriced immediately, while deposit costs are recalibrated more gradually to reflect the relative competitive intensity in drawing funds from savers.
About 60% of commercial bank's loans are pegged to external benchmarks, like the policy repo rate that was lowered the second time in as many months to 6%.
For private sector banks, the share of external benchmarks lending rate (EBLR) loans-or advances linked to repo rate-is 85.9%, while for public sector banks it is 44.6%. Effectively, the margins of private banks are expected to be impacted more than PSU banks.
While loans linked to external benchmarks get repriced immediately, that is not the case with deposits as they are contracted at a fixed rate and the cost of funds comes down gradually as banks only price newer deposits at a lower rate.
On Wednesday, RBI lowered the repo rate, for the second time in 2025, by 25 basis points to 6% and changed the monetary policy stance from neutral to accommodative, while hinting that more rate cuts could be in offing "absent any shocks."
According to analysts at Emkay Global, the rate cuts have been consecutive and swift compared to the earlier expectation of a shallow rate cycle. This could accelerate pressure on margins for banks with higher share of floating rate (EBLR) loans, as deposit repricing (downward) could happen with a lag. "We believe that the cumulative impact of a 50 bps repo rate cut, partly offset by a CRR cut, could be 7-20 bps on margins, without factoring in any immediate deposit rate cut," Emkay said in a note.
Rating agency ICRA estimates a 15-17 basis point decline in the banks' net interest margins (NIMs) during FY26.
According to industry executives, while improving liquidity conditions has allowed banks to lower deposit rates, slower growth amid intense competition to mobilise liabilities have led to elevated credit-deposit ratios. This poses a challenge for them to cut deposit rates.
In the last fortnight, several banks have reduced deposit rates by 25-40 bps, while others adjusted their special deposit schemes in the new fiscal, replacing them with a lower rate. This will pave the way to lower the marginal cost of fund-based lending rates (MCLR), which are benchmarked to internal cost funds.
Loans tied to MCLR take longer to reflect the rate cut-typically two quarters-due to the standard reset period of six months, industry executives said.
"The savings deposit share holds around 30% and remained sticky in interest rate. So, the overall transmission to deposit rates remained low as savings deposit rates remained unresponsive to policy rate changes," stated SBI Ecowrap, a research report by State bank of India.
"In addition, the decline in the share of current CASA deposits in total deposits, along with the higher transmission to term deposit rates vis-a-vis lending rates have exerted downward pressure on the NIMs of banks," it added.
As of December 2024, RBI data shows that 60.6% of floating-rate loans are linked to external benchmarks, while 35.9% are tied to MCLR. Soon after the Reserve Bank of India announced its policy, Punjab National Bank, Bank of India, Karur Vysya Bank, and Indian Bank reduced EBLR by 25-35 bps.
About 60% of commercial bank's loans are pegged to external benchmarks, like the policy repo rate that was lowered the second time in as many months to 6%.
For private sector banks, the share of external benchmarks lending rate (EBLR) loans-or advances linked to repo rate-is 85.9%, while for public sector banks it is 44.6%. Effectively, the margins of private banks are expected to be impacted more than PSU banks.
While loans linked to external benchmarks get repriced immediately, that is not the case with deposits as they are contracted at a fixed rate and the cost of funds comes down gradually as banks only price newer deposits at a lower rate.
On Wednesday, RBI lowered the repo rate, for the second time in 2025, by 25 basis points to 6% and changed the monetary policy stance from neutral to accommodative, while hinting that more rate cuts could be in offing "absent any shocks."
According to analysts at Emkay Global, the rate cuts have been consecutive and swift compared to the earlier expectation of a shallow rate cycle. This could accelerate pressure on margins for banks with higher share of floating rate (EBLR) loans, as deposit repricing (downward) could happen with a lag. "We believe that the cumulative impact of a 50 bps repo rate cut, partly offset by a CRR cut, could be 7-20 bps on margins, without factoring in any immediate deposit rate cut," Emkay said in a note.
Rating agency ICRA estimates a 15-17 basis point decline in the banks' net interest margins (NIMs) during FY26.
According to industry executives, while improving liquidity conditions has allowed banks to lower deposit rates, slower growth amid intense competition to mobilise liabilities have led to elevated credit-deposit ratios. This poses a challenge for them to cut deposit rates.
In the last fortnight, several banks have reduced deposit rates by 25-40 bps, while others adjusted their special deposit schemes in the new fiscal, replacing them with a lower rate. This will pave the way to lower the marginal cost of fund-based lending rates (MCLR), which are benchmarked to internal cost funds.
Loans tied to MCLR take longer to reflect the rate cut-typically two quarters-due to the standard reset period of six months, industry executives said.
"The savings deposit share holds around 30% and remained sticky in interest rate. So, the overall transmission to deposit rates remained low as savings deposit rates remained unresponsive to policy rate changes," stated SBI Ecowrap, a research report by State bank of India.
"In addition, the decline in the share of current CASA deposits in total deposits, along with the higher transmission to term deposit rates vis-a-vis lending rates have exerted downward pressure on the NIMs of banks," it added.
As of December 2024, RBI data shows that 60.6% of floating-rate loans are linked to external benchmarks, while 35.9% are tied to MCLR. Soon after the Reserve Bank of India announced its policy, Punjab National Bank, Bank of India, Karur Vysya Bank, and Indian Bank reduced EBLR by 25-35 bps.
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