Banking system may face near-term margin pressures, says RBI report

Lower NIMs, slow credit growth, and high-cost deposits likely to add to its woes

The Indian banking system, although resilient, could face near-term pressure on its margins due to an easing monetary policy, slowing credit growth, and a negative credit impulse as well as a shift in banks’ liability profiles, with the share of higher-cost term deposits and certificates of deposit (CDs) rising relative to low-cost current account and savings account (CASA) deposits, the Reserve Bank of India (RBI) said in its Financial Stability Report.

 

According to the RBI, the easing monetary policy cycle could impact banks’ net interest margins (NIMs) as a growing share of the loan book is linked to the external benchmark-based lending rate (EBLR), which resets more frequently with changes in the repo rate. In contrast, term deposits — which are also rising — carry fixed contractual rates that are revised less frequently. However, the central bank noted that the recent 100 basis point (bp) cut in the cash reserve ratio (CRR) will help cushion this impact by releasing funds for banks and reducing their costs.

 

Secondly, the slowdown in credit growth, and credit impulse turning negative could also put pressure on the banks. Credit growth in the system is growing in single digits, and has come off massively from its peak of over 20 per cent growth back in 2024.

 

“Pursuant to the RBI’s decision to increase risk weights on certain segments of consumer credit and bank lending to NBFCs (non-banking financial companies), loan growth in these two sectors has fallen sharply, contributing to a slowdown in total loan growth. Overall, a more cautious approach by lenders, improvement in lending standards, and the restoration of risk weights on bank lending to NBFCs are stability-enhancing and credit-positive”, the RBI said in the report. 

 

Additionally, according to the RBI, economic slowdown, if any, amid heightened uncertainty could drag credit demand lower, which may impact asset quality and profitability.

 

Another area of concern highlighted by the central bank is the changing profile of banks’ liabilities, with a growing share of higher-cost term deposits and CDs compared to low-cost CASA deposits.

 

Meanwhile, the RBI also highlighted that asset quality of unsecured retail portfolio, which forms 25 per cent of retail loans and 8.3 per cent of gross advances, relatively weakened compared to the overall retail portfolio, with gross non-performing asset (GNPA) ratio at 1.8 per cent vis-à-vis 1.2 per cent in March 2025, especially in respect of private sector banks.

 

“Slippages in unsecured retail loans remain elevated for private banks. Fresh slippage in unsecured retail loans continues to dominate the overall slippage,” the RBI said.

 

The central bank also highlighted that consumer segment loans grew at a CAGR (compound annual growth rate) of over 20 per cent between March 2021 and March 2025, compared to 14.6 per cent growth in the overall loans. However, the growth slowed following the implementation of regulatory measures by the RBI in the third quarter of 2023-24 (Q3FY24). “Even as loan growth to the consumer segment slowed down, the quality of the portfolio has improved,” the RBI said, adding that delinquency levels, except credit cards, have decreased, upgradations from SMA-2 accounts have risen, and slippages from SMA-2 accounts have fallen. The GNPA ratio of Scheduled Commercial Banks’ (SCBs’) consumer segment loans stood at 1.4 per cent in March 2025,” it said.

 

Fresh risks build up

• NIMs may decline as more loans are linked to the EBLR, which  adjusts more frequently  than deposit rates
• Term deposits and CDs are  growing faster than low-cost Casa deposits, increasing funding costs
• Credit growth has slowed to  single digits, down from over  20% in 2024
• Unsecured retail loans showing weaker asset quality, with GNPA at 1.8% vs 1.2% in March 2025
• Private sector banks facing higher slippages in unsecured retail loans