Bank margins to stay under pressure; recovery seen from FY27: Ambit

Deposit competition, liquidity pressures and shifting household savings are weighing on bank margins, with a meaningful recovery expected only from the first half of FY27

Bank margins likely to remain under pressure in the near term, with a gradual recovery expected only from the first half of FY27, according to a report by Ambit Capital.

 

“Bank margins have undergone a granular contraction since Q4FY25, dictated by an easing monetary cycle,” the report said. It added that while some support may come from liability repricing, “a meaningful margin revival over FY27–28E hinges on the maturation of high-cost, long-term deposits.”

 

What are the key factors pressuring bank margins?

 

Liquidity conditions and deposit competition are key challenges. The report said that any hike in the policy rate by the Reserve Bank of India (RBI) would likely be margin accretive through rapid yield transmission. “Tightening liquidity and inflation-driven erosion of savings are intensifying the ‘war for deposits,’ forcing banks to raise rates and increase their cost of funds,” the report noted, adding that margin estimates have been revised downward due to these pressures.

   

What is the outlook for credit growth?

 

On the asset side, credit growth is expected to moderate but remain resilient. The report projected “11–13 per cent credit growth for FY27E” under its base case.

 

It outlined a range of outcomes depending on macro conditions. “Credit growth can slow to 10–12 per cent” in a downside scenario, while in a more favourable environment it could increase to “13–15 per cent,” it said.

 

Credit growth in the retail segment remained at par with system credit growth during 9MFY26, registering 14.4 per cent year-on-year. However, the same remains driven by secured lending, which continues to witness healthy momentum, 17.1 per cent Y-o-Y, while caution persists in the unsecured segment.

 

Which segments are driving loan growth?

 

The report said gold loans, vehicle loans, and loans against property (LAP) are emerging as key growth segments, though with risks. Gold loans are seeing mid- to high-teens growth, aided by higher gold prices, but remain exposed to price volatility and loan-to-value risks. Vehicle loans are growing at low- to mid-teens levels on the back of auto demand, but face risks from economic slowdown and borrower stress. LAP is also witnessing mid-teens growth, driven by small business demand, with risks from cash flow disruptions. It added that banks are relying on these secured segments to support credit growth while keeping a close watch on risks and margins.

 

How are deposit trends affecting banks?

 

On the liabilities side, the report highlighted structural pressures in deposit mobilisation. It flagged a “deposit paradox” driven by a shift in household savings towards capital markets, resulting in slower deposit growth and higher sensitivity to interest rates.

 

The report also highlighted a shift in household savings behaviour and its impact on low-cost deposits. It said the share of household financial savings in bank deposits is declining as more funds move towards market-linked instruments.

 

“India’s deposit growth has plateaued as household savings undergo a secular migration,” it said, adding that the impact is most visible in low-cost CASA (current account and savings account) deposits.

 

The system deposits for banks grew by 11.1 per cent CAGR from FY21-25. At the same time, the share of household deposits fell to 60.2 per cent in FY25 against 64.1 per cent in FY21, whereas the contribution from non-household (government/corporate/financial institution, etc.) witnessed a surge. Further, the share of savings account to overall deposits declined to 29.1 per cent in FY25 from 33.6 per cent in FY21.

 

The report said the impact is visible in declining CASA ratios, as customers increasingly seek higher-yielding alternatives, forcing banks to depend more on term deposits and raising overall funding costs.

 

What does the report say about banking sector stability?

 

The report noted that loan-to-deposit ratios have risen to multi-year highs, creating funding constraints and limiting balance sheet expansion.

 

Despite these pressures, banks’ fundamentals remain stable. “Robust balance sheets and potential regulatory buffers provide short-term insulation against asset-quality shocks,” the report said.

 

How will competition between banks evolve?

 

On competitive dynamics, the report expects private sector banks to regain momentum. It said they are likely to “pivot back to aggressive growth,” which could reduce the recent market share gains of public sector banks.

 

While public sector banks have outperformed in recent years, the report suggested this trend may stabilise as private banks step up growth.