RBI chief flagged banks' margin stress, and they see it continuing

Mumbai: While lauding the robust health of India's banking system, Reserve Bank of India Governor Sanjay Malhotra had last week flagged a decline in the sector's margins for the one year period ended June 2026, and lenders see little respite just yet.India's banking system net interest margin (NIM) was at 3.21% in June 2026, as against 3.26% a year ago, as per data by the central bank.While some expect the margins to stabilize after the June quarter squeeze, others see more pressure ahead, as deposit costs remain high and strong credit growth keeps the race for funds intense. Margins are also seen under pressure from flows under the foreign currency non-resident FCNR(B) deposit scheme.“We believe this is a cycle bottom as far as NIMs are concerned. So, we are hopeful that from here on you will see the NIMs journey moving in the right direction,” Axis Bank’s chief financial officer Puneet Sharma said in the Q1 earnings call on 18 July. The private sector lender’s NIM has been consistently shrinking, falling to 3.46% during the reporting quarter from 3.62% in the previous quarter and 3.80% a year ago.Other lenders such as Bank of Baroda and IndusInd Bank highlighted that the persistently high pace of credit growth as compared to the increase in deposits is likely to continue to put pressure on deposit mobilization, and subsequently margins. What also weighed on margins was a pick-up in lower-yielding corporate loans, as against high yielding retail loans during the quarter.While these banks are hopeful that a pick-up in retail loans over the coming quarters will help normalize margins, going ahead, most lenders refused to share a guidance on the margin trajectory, citing uncertainty due to several macroeconomic factors and expectations of elevated operating expenses.In a 4 August note, CareEdge Ratings said that while the rise in operating expenses of banks was “contained” at 3.9% in Q1 FY27, the restraint looks temporary, with banks committed to branch expansion, specialist hiring and technology spending through the year.“Pre-provisioning operation profit (PPOP) growth is expected to slow down from current levels. Future margin improvement will depend on whether lower funding costs also benefit the larger private banks,” it said, adding that even public sector banks posted better interest income largely owing to growth in their other income and investment portfolio, instead of better margins.ICICI Bank, which posted an increase in margins both sequentially and on year, was less optimistic. It said margins are likely to be range-bound through the current fiscal year. Executive director Sandeep Batra attributed the improvement in margins during the quarter to income tax refunds and repricing of some bulk term deposits.The FCNR Factor“The NIM trajectory would depend on a number of factors, which includes, of course, the geopolitical developments, monetary policy, liquidity, loan growth, and local pricing. Our expectations of NIM is that in FY27 it should be range-bound,” he said, adding that there will also be some impact of the FCNR(B) deposit programme and the leverage offered against these deposits, which are expected to be “slightly NIM dilutive”.At its earnings conference on 6 August, State Bank of India chairman C.S. Setty said it is too early to assess the impact of FCNR flows, but any benefit on cost of funds from repricing of high-cost bulk deposits could be offset by margin dilution owing to leverage offered against such deposits. The country’s largest lender maintained its NIM guidance of 3% for FY27 after posting 2.86% for the June quarter.Several large private lender, such as HDFC Bank and ICICI Bank, have since also hiked the interest rates on their FCNR deposits, and now offer upto 6.25% return.“Competition has picked up. HDFC Bank has hiked their FCNR dates and following that even ICICI has hiked the rates…In our view. Q1 wasn’t the bottom for bank margins, Q2 will be under greater pressure because FCNR money isn’t