Lenders brace for margin headwinds as rate cuts kick in

India's top private banks have warned of margin pressures in the short term as they look to factor repo rate cuts by the central bank into their deposit and loan products, and as competition on pricing of loans intensifies in the banking industry.

- Anshika Kayastha & Gopika Gopakumar

HDFC Bank, ICICI Bank and Yes Bank, which released their March quarter earnings on Saturday, said in their post-earnings calls that the reduction on fixed deposit interest rates—the fastest growing segment for deposit accretion—is expected to play out over the next few quarters, thus keeping margins—primarily NIM (net interest margin)—under pressure.

Sandeep Batra, executive director, ICICI Bank, said at a post-earnings call that margins will get impacted by repo rate cuts "because a fair bit of loans are linked to the external benchmark, which reprice pretty fast within three months, whereas deposits reprice with a lag". He added, however, that the bank is focused on overall profitability, of which NIM is only one component.

ICICI Bank said 31% of its loan portfolio is fixed rate, 53% is linked to the repo rate or external benchmarks, and 15% of loans are linked to the marginal cost of funds-based lending rate (MCLR) as of March 2025.

HDFC Bank, which has been strategically growing its deposit book faster than loan growth to normalize its credit-deposit ratio, said that while there will be stability in margins from a longer-term perspective, there could be some volatility in margins in the short term.