Relief Ahead: Indian Banks' Net Interest Margins Set to Stabilize

Indian banks may soon see relief from net interest margin pressure as they shift towards lower-cost funding. Kotak Institutional Equities predicts stabilization or slight improvement in margins. Despite robust loan growth and solid earnings, credit growth is expected to normalize, with an overall positive outlook on asset quality and credit costs.

Net interest margin pressures on Indian banks are poised to ease, according to Kotak Institutional Equities. The firm suggests a shift towards lower-cost funding, like FCNR and retail deposits, could stabilize or slightly enhance margins. The brokerage also foresees a slowdown in credit growth as corporate loan demand returns to normal levels.

Banks in Kotak's coverage reported a notable 14% year-on-year increase in earnings for FY27's first quarter, with net interest income rising by 11%, driven by strong loan growth and a 32% reduction in provisions. Public and private banks posted a 17% growth in loans year-on-year, with small finance banks topping 25-30%.

Retail credit growth accelerated to 16% in June 2026, led by a 100% rise in loans against gold and significant growth in housing, education, and vehicle loans. However, Kotak anticipates a deceleration in loan growth, citing one-off corporate borrowing due to geopolitical tensions. Public sector banks outperformed with stable margins, while private banks faced greater NIM pressure.

Asset quality showed improvement with gross and net NPL ratios dropping to 1.7% and 0.4%, respectively. Kotak maintains a positive short-term outlook on asset quality and credit costs, favoring frontline private banks and SBI among public sector options as NIM pressures are expected to diminish.