Bank NIMs may shrink by 30 bps in FY26 on loan repricing: Fitch Ratings

Indian banks are likely to see a contraction of 30 basis points (bps) in their Net Interest Margins (NIMs) in 2025-26 (FY26) as 45 per cent of loans in the system are repriced downward immediately. This reflects the transmission of repo rate cuts to borrowers, according to Fitch Ratings.

 

According to the agency's estimates, the banking system level NIMs of Indian banks stood at 3 per cent in FY25.

 

Banks price their loans, especially retail loans, by linking them to external benchmarks like repo rate. With change in the external benchmark — upward or downward — lenders make immediate changes in floating loan rates. Since February 2025, the Reserve Bank of India (RBI) has reduced policy repo rate by 100 bps to 5.5 per cent, and taken steps to inject resources.

 

In a statement, Fitch said, “Surplus liquidity conditions will likely accelerate the decline in the cost of fresh deposits. Nevertheless, we expect a 30-bp contraction in margins in FY26 as 45 per cent of sector loans reprice downward immediately, without material improvement in the share of low-cost deposits.” 

 

However, margin pressures should moderate as deposit costs fall in FY27, helped by lower Cash Reserve Ratio (CRR) requirements, it added.

 

As a step to protect margins, banks — both private and public sector — have cut interest rates on savings as well as term deposits in the backdrop of 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 financial year. The extent of reduction is about 60 bps for short-term deposits. Plus, it reduced the rate on savings deposits by 20 bps.

 

Fitch said it expects funding and liquidity conditions to be sensitive to changes in the central bank’s liquidity stance, and shifts in retail savings. Lower interest rates will likely support asset quality, but significantly higher loan growth could raise risks, which can be offset by potentially improved risk pricing, it added.