India’s Bank Margins to Recover by FY26 Q3: Report
India’s banking sector is expected to see a turnaround by the third quarter (Q3) of FY26, with net interest margins (NIMs) stabilising and earnings recovering, according to a report by Motilal Oswal Financial Services on Thursday.
This positive outlook is due to easing funding costs, a planned cut in the Cash Reserve Ratio (CRR), and normalisation of credit costs.
Private sector banks are showing strong performance by maintaining lending yields despite multiple repo rate cuts by the Reserve Bank of India (RBI). The report said private banks have increased their spreads on fresh loans, helping protect their profits even in a low-rate environment.
In May 2025, the weighted average lending rate (WALR) on fresh loans for private banks rose by 7 basis points compared to April. This shows strong pricing strategies and good credit demand. The spread on fresh rupee loans over the repo rate reached its highest since August 2022, now at 415 basis points.
Private banks also performed better than others in terms of WALR on outstanding loans. While the overall WALR on outstanding loans in the system fell slightly to 9.67% in May, private banks saw a small increase of 2 basis points.
On the funding side, deposit rates are starting to decline. The weighted average term deposit rate (WATDR) for private banks fell slightly to 7.19% in May. Banks are expected to cut savings and term deposit rates further by 20 to 100 basis points in coming months.
The full benefits of lower deposit rates will likely be seen in the second half of FY26, easing funding pressure on banks.
Motilal Oswal said NIMs may remain under pressure for now but should bottom out by Q2 or Q3 of FY26. The planned CRR cut from September 2025 will inject around Rs 2.5 lakh crore into the banking system, helping margins recover further.
Credit costs are also expected to decline as asset quality improves, especially in retail and microfinance. This will support earnings recovery in the later part of FY26, the report added.
