Indian banks are experiencing margin pressure following the RBI's 25 basis points repo rate cut in December 2025, with the full impact now reflecting in lending rates. According to Systematix Institutional Equities banking sector report, Yield on Advances (YoA) was sequentially lower as the quarter had the complete impact of the rate reduction. Major banks including State Bank of India (SBI), Axis Bank and Indian Bank reported sharper pressure on margins during the quarter. The report notes that net interest margins (NIMs) face pressure as banks earned relatively lower interest income from loans after the rate cut started reflecting fully in lending rates.
Indian banks are experiencing a challenging paradox where credit growth of 16% significantly outpaces deposit growth of 12.3%, according to recent earnings calls of major public sector lenders. This scenario, while appearing favorable on paper, is creating operational challenges as lenders increasingly rely on costlier funding sources to maintain loan growth momentum. Latest analyst reports show bank deposits rose 12.2% year-on-year, below credit growth of 15%, while term deposits remained the dominant funding base at 87.4% of total deposits. The outstanding spread between weighted average lending and term deposit rates stood at 2.37% in March 2026, down 34 basis points year-on-year but broadly flat sequentially. However, the Systematix report highlights that deposit growth outpaced loan growth sequentially during the quarter due to year-end seasonal trends, indicating customers continue to keep money in banks.
Despite margin pressures, bad loans remain largely under control with slippages in the January-March quarter of FY26 broadly in control, according to the Systematix report. Most banks reported stable asset quality during the quarter, with no incipient rise in asset quality yet. However, banks are preparing for the new Expected Credit Loss (ECL) framework implementation, under which lenders may have to set aside money in advance for possible future loan defaults. The report notes that banks expect the true impact of the West Asia war to be visible in Q2FY27 or in H2FY27, as prolonged geopolitical tensions could impact businesses and borrowers if higher oil prices and global uncertainty persist.
Banks are now focusing more on increasing low-cost deposits such as savings and current accounts (CASA deposits) to protect profitability in a falling interest rate environment, as noted in the Systematix report. This strategic shift comes as banks face the challenge of credit growth outpacing deposit growth, forcing them to raise retail deposit rates to maintain funding levels. The report emphasizes that growth in net advances for the coverage universe saw sustained growth in Q4, with aggregate loan growth remaining strong on both quarterly and annual basis. Public sector banks' one-year median MCLR fell by 33 basis points year-on-year to 8.75% in April 2026, while private banks' median MCLR fell more sharply by 75 basis points to 9.25%.
Despite near-term margin pressures, the banking sector shows resilience with overall health remaining steady, according to the Systematix report. The brokerage remains positive on the banking sector overall despite the challenges. Indian Bank is entering the wealth management business as part of its strategic diversification, with CEO Binod Kumar citing the need to focus on revenue rather than just total business. The bank plans to raise ₹2,500 crore with a greenshoe option of another ₹2,500 crore to absorb the impact of Expected Credit Loss (ECL) norms, which could impact ₹4,000-6,000 crore. If the entire ₹5,000 crore is raised, the government's holding will fall from 73.84% to about 70.9%.
