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Bank NIMs may shrink by 30 bps in FY26 on loan repricing: Fitch Ratings
The agency estimated that system-level NIMs for Indian banks stood at 3.0 per cent in the financial year ended March 2025 (FY25).
Banks, especially for retail loans, price their offerings by linking them to external benchmarks such as the repo rate. When the benchmark rate changes—either upward or downward—lenders promptly adjust floating loan rates. Since February 2025, the Reserve Bank of India (RBI) has reduced the policy repo rate by 100 basis points to 5.5 per cent and taken steps to inject liquidity into the system.
In a statement, the rating agency said: 'Surplus liquidity conditions will likely accelerate the decline in the cost of fresh deposits. Nevertheless, we expect a 30bp contraction in margins in the financial year ending March 2026 (FY26), as 45 per cent of sector loans reprice downward immediately, without material improvement in the share of low-cost deposits.'
However, margin pressures are expected to moderate in FY27 as deposit costs ease, aided by lower cash reserve ratio (CRR) requirements, it added.
As a step to protect margins, both private and public sector banks have cut interest rates on savings and term deposits amid a surge in liquidity surplus and subdued credit growth. The country's largest bank, State Bank of India, has reduced term deposit rates three times in the current fiscal. The cumulative reduction for short-term deposits is about 60 basis points. Additionally, it has lowered the interest rate on savings deposits by 20 basis points.
Fitch said it expects funding and liquidity conditions to remain sensitive to changes in the central bank's liquidity stance and shifts in retail savings. While lower interest rates are likely to support asset quality, significantly higher loan growth could raise risks—though these may be offset by improved risk pricing, the agency noted.
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