“The banking sector’s net interest margin (NIM) is expected to hold steady at 2.9% this fiscal, after declining 20 basis points (bps) last fiscal,” said Subha Sri Narayanan, Director, Crisil Ratings. “Outstanding deposit rates fell ~50 bps against a decrease of ~80 bps in lending rates last fiscal, following a cumulative repo rate cut of 125 bps. However, the cost of liabilities has likely bottomed out. As credit growth continues to outpace deposit growth, competition for deposits remains intense. This, coupled with increasing reliance on pricier funding sources such as bulk deposits, would likely push deposit costs up,” she added.
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Crisil Ratings expects NIM on a full-year basis to remain stable, though higher deposit costs may lead to a correction from last fiscal’s exit NIM of above 3% in the fourth quarter. The agency’s base-case assumes a stable policy rate this fiscal. Apart from NIM, fee and other income will also impact earnings. Total other income is likely to soften by 5-10 bps to 1.2% last year, primarily due to normalization in treasury income after sharp bond yield gains in H1 last year. Fee and commission income should grow steadily, underpinned by healthy bank credit growth of around 13% this fiscal.
Credit cost remained at a decade-low of ~0.4% last fiscal, supporting profitability and helping keep RoA range-bound despite NIM moderation. However, provisioning expenses could see an uptick this fiscal. “Banking sector provisions could rise 5-10 bps this fiscal–though remaining benign at sub-0.5%–due to proactive provisioning ahead of the new ECL framework,” said VOjasvi, Associate Director, Crisil Ratings. Although the new norms take effect on April 1, 2027, and allow a glide path, some banks have advanced part of the provisions, a trend that may continue.
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The ECL framework shift is one of two key reasons for RoA pressure. The other is reduced treasury income due to rising bond yields. Operating expenditure is likely to remain largely stable, with a potential nominal increase from implementation of the new labour codes notified on November 21, 2025, for which detailed guidelines are awaited. Crisil Ratings said that even in a scenario of a protracted West Asia conflict and inflation surge forcing RBI repo rate hikes, banks’ NIM may inch up as most loans are floating rate and reprice faster than fixed deposits, limiting downside risk to profitability.