Banks see thinning spreads, driven by credit dip, lower deposits, rate cuts

Growing competition in corporate and institutional credit as well as in home loans, and lower interest rates have also put pressure on lending margins

For the first quarter ended June of financial year 2025-26 (Q1FY26), the net interest margin (NIM) of banks fell by 25 basis points to 2.89 per cent year-on-year (Y-o-Y) and by 10 bps quarter-on-quarter (Q-o-Q). This comes even as the net-interest income (NII) rose by 1.8 per cent to Rs 2.07 lakh crore (1 per cent qoq) during this period.

 

This decline in NIM, according to CareEdge Ratings, was driven by subdued credit growth, deceleration in current and savings deposits, and a central bank rate cut, resulting in a quicker reduction in lending rates relative to deposit rates. Intensifying competition in high-quality corporate and institutional credit as well as the home loan market; and lower interest rates due to competition have also put pressure on lending margins, contributing to overall NIM compression. 

 

     

            The larger setting to what is happening on the NIM front was articulated in the Financial Stability Report of June 2025. It observed that despite the solid performance of banks during the last three years, they could face some pressure in the near-term. This easing monetary policy cycle could impact NIMs as the growing share of the loan book is linked to the external benchmark-based lending rate, which is reset more frequently with changes in the repo rate. And term-deposits have fixed contractual rates that change less frequently, the cost (of deposits) are locked-in.