Banks’ margins to remain under pressure amid robust loan growth, high cost of funds

Subscribe to enjoy similar stories.Interest rate margins may remain under pressure in the first half of the current financial year, as lenders continue raising funds at high costs to match soaring loan growth. In the March quarter, margins for most banks, especially the mid-sized lenders, were flat to slightly lower.Margins compress when banks cut loan rates in line with benchmarks, but continue paying deposit interest at assured rates until they mature.

Raising rates as deposits mature could help ease some of the margin pressure, but the banks are also constrained by their need to raise deposits to support loan growth.According to Fitch Ratings, an increased share of loans to retail, agriculture and MSME customers may help margins, as these loans are priced higher. However, this will be partly offset by a gradual shift towards secured loans which are given out at lower rates as well as lower treasury gains, the ratings company said in a note on 22 April.“There could also be moderate downside risks if liquidity is tighter than we expect due to the RBI’s efforts to contain rupee volatility,” it said.

ICICI Bank, Axis Bank and Bank of Maharashtra which focus on higher-yielding segments and keep funding costs in check will enjoy higher margins, Fitch added.At India's largest private sector banks HDFC Bank and ICICI Bank, margins were 8-9 bps lower annually, but were up 2-3 bps on the quarter. The prime reason: Accelerated reduction in lending rates while deposit costs remained elevated.

Both banks have said that while the outlook on margins is uncertain, they are likely to be "range-bound".Between February and December 2025 last year, the Reserve Bank of India cut the repo rate by a total of 125 bps. Banks in India bring