Evolving Banking Landscape: Margins, Credit, and Growth Patterns

Declining interest rates are set to impact banks' net interest margins short-term but are expected to rebound by FY27. Asset quality is improving, with credit growth projected at 11-12% for FY26. The report also highlights varying impacts on different banks due to loan mixes and enhanced credit demand.

Banks are bracing for a period of moderated net interest margins (NIM) due to recent interest rate cuts by the Reserve Bank of India (RBI), according to PhillipCapital's latest report. A 100 basis point reduction in the repo rate has been implemented since February 2025, which may squeeze margins before a predicted recovery in FY27.

ICICI Bank, DCB Bank, AU SFB, and Axis Bank are among those likely to see minimal impact on their NIM, whereas HDFC Bank and SBI could experience more notable pressures. In contrast, IndusInd Bank and Bandhan Bank are expected to face the most significant impact due to changes in their loan portfolios. Despite these challenges, banks' asset quality is on the rise, as seen in a steady decrease in stressed assets across the sector.

While past issues such as corporate NPA cycles and pandemic-induced unsecured NPAs have largely been addressed, some strains remain in smaller unsecured loans. However, metrics in home and vehicle loans are stable, with Public Sector Banks gaining more ground in market share. The report anticipates credit growth between 11-12% for FY26, bolstered by reduced stress in unsecured retail loans and enhanced consumer savings.

(With inputs from agencies.)