Banks are expected to see their net interest margin (NIM) remain range-bound sequentially, with possible downward bias, as the Reserve Bank of India's (RBI) 25 basis points repo rate cut transmission in December occurs on the lending side, especially on loans which are linked to marginal cost of funds based lending rate (MCLR) benchmark which re-prices after a lag. According to reports from The Hindu BusinessLine, Sandeep Batra, ED at ICICI Bank, expects NIMs to remain 'more or less range-bound' going ahead, reflecting the repricing of the external benchmarks on loans and investments. The RBI's draft norms on the expected credit loss framework also mandate that banks set aside more funds for potential bad loans on implementation, with negligible impact on capital-to-risk-weighted-assets ratio.
ICICI Banks' NIM stood at 4.30 per cent in Q3, remaining flat sequentially, while Federal Bank's NIM improved 12 basis points sequentially to 3.18 per cent in Q3. As reported by The Hindu BusinessLine, KVS Manian, MD and CEO at Federal Bank, said the bank is changing the mix of its liability profile, increasing low-cost current account and savings account (CASA) share in overall deposits, and growing medium yield assets faster than the low yielding ones. Canara Bank's management has guided for the bank's net interest margin to stabilise in the 2.45-2.50% range, against the guidance of 2.75-2.80% for the financial year 2025-26.
Banks are focusing on expanding their high-yielding portfolio of loans in the retail, agriculture, and micro, small, and medium enterprises sectors to protect their net interest margins. According to EquityWire, Canara Bank's credit to the retail, agriculture, and micro, small, and medium enterprises sectors rose 4.5% on quarter and 18.7% on year to ₹7.04 trillion as on Dec. 31, growing to 59% of its total advances. The bank has cut down on its low-yielding corporate advances as it seeks to ensure a higher return on credit disbursed. Retail credit alone grew by nearly a third to ₹2.73 trillion, but the gross non-performing asset ratio was 0.49% for the sector as on Dec. 31.
On a longer term basis, the downward pressure on lending yields and resistance in deposit yields is likely to ensure that NIMs would remain capped. As reported by The Hindu BusinessLine, Manian said a large part of the last rate cut will play out in the next quarter, but the bank hopes to continue this journey for many more quarters to go. He emphasized that the journey is not anywhere close to the peak of what they want to get, indicating sustained focus on improving deposit mix and asset quality. Canara Bank's management has guided for the bank's net interest margin to stabilise in the 2.45-2.50% range, with pressure on NIM remaining due to loans, of which around 48% are linked to repo rate changes, being repriced quicker than deposit rates could come down.
Canara Bank remains well capitalised with its capital-to-risk-weighted-assets ratio at 16.50% as on Dec. 31, up from 16.20% at the end of September. The bank has board approval to raise another ₹60 billion in FY26 through tier-II bonds and is looking for an opportune moment to tap the market during the current quarter. The bank is positioned well to deal with the costs associated with the Reserve Bank of India's expected credit loss norms, proposed to come into effect from April 1, 2027. The total cost to the bank is estimated to be around ₹100 billion over four years of implementation between 2027 and 2031, though it may be lower depending on the movement of bad loans in the portfolio.