Indian Banks See Steady Deposit Growth But Margins Under Pressure In Q1 FY26

The Indian banking sector is seeing a steady rise in deposits, but banks may face a squeeze on their net interest margins (NIM) in the first quarter of the financial year 2026, according to a report by Phillip Capital. The report said overall deposit growth is gaining pace, which is helping improve the credit-to-deposit ratio. Based on business updates so far, total credit growth has been 0.4 per cent on a sequential basis.

However, the report pointed out that growth in Net Interest Income (NII) remains weak across banks due to slow credit expansion. It expects NII to rise only 1 per cent year-on-year (y-o-y) and fall 1.5 per cent quarter-on-quarter (q-o-q). The sector-wide NIM is likely to drop by 10 basis points (bps) q-o-q and 30 bps y-o-y. This is mainly because the cost of funds has stayed steady while returns from repo-linked loans have fallen.

Private sector banks have done slightly better. They reported a 0.5 per cent q-o-q rise in loans and a 1.3 per cent q-o-q jump in deposits. Their credit-to-deposit ratio stands at 92 per cent, down 0.8 per cent q-o-q. Meanwhile, public sector banks (PSBs) showed just 0.2 per cent q-o-q loan growth, with deposits staying flat. Their credit-to-deposit ratio remained stable at 78 per cent.

In terms of income, private banks are expected to see a 1.9 per cent y-o-y drop and a 0.8 per cent q-o-q fall in NII. PSBs may post a smaller 0.3 per cent y-o-y decline but a sharper 2.4 per cent q-o-q drop. On profitability, banks are likely to show slight growth in profit after tax (PAT), helped by lower credit costs. Overall, PAT is forecast to rise 3.5 per cent y-o-y and 0.8 per cent q-o-q.

Among segments, PSBs may report a 7 per cent y-o-y increase in PAT but a 4.1 per cent q-o-q decline. Private banks could see a 1.4 per cent y-o-y and 4.2 per cent q-o-q growth. Credit costs are also improving due to better asset quality. The report estimates credit cost at 59 bps for Q1 FY26, down from 64 bps in Q4 FY25 but up from 52 bps in Q1 FY25.

Overall, while deposit growth is positive, the report said that pressure on margins and core earnings will be important to watch in the upcoming results.