India’s banking sector may continue to face pressure on margins as interest rate transmission remains uneven in the near term. According to a report by CareEdge Ratings, faster adjustments in lending rates compared to deposit rates are likely to limit improvement in spreads.
Lending rates, especially on fresh loans, have responded quickly to earlier policy easing. However, deposit rates have remained relatively sticky due to strong competition for deposits. This gap is keeping funding costs high and restricting any major expansion in margins over the coming quarters.
As of March 2026, the spread between weighted average lending rates and term deposit prices for scheduled commercial banks stood at 2.37%, down by 34 basis points year-on-year. Sequential data suggests that most of the compression has already taken place, with spreads now stabilising as both lending and deposit prices begin to move more closely.
The report expects lending rates to continue easing gradually, supported by a higher share of external benchmark-linked loans and competitive pressure. In contrast, deposit prices are likely to adjust more slowly due to challenges in deposit mobilisation and a shift of household savings towards other financial instruments.
Rate transmission has been stronger in lower-risk segments such as housing and highly rated corporates, where competition remains high. This trend has shifted credit growth towards lower-yielding segments, affecting overall lending returns despite strong demand.
System-level credit growth remains strong at 15% year-on-year as of mid-April. Growth is being driven by retail segments like gold and vehicle loans, along with MSME lending and increased exposure to NBFCs. Deposit growth has improved, but the share of time deposits remains high, keeping funding costs elevated.
Liquidity conditions, which stayed in surplus through April due to government spending and bond redemptions, may become more variable. Factors such as high crude prices and currency volatility could impact liquidity through forex interventions by the Reserve Bank of India.
The report also notes that repricing of older loans will continue to impact overall yields, even as new loans adjust faster. Increased competition in fresh lending has further reduced pricing power for banks.
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