Indian banks are facing renewed pressure on their Net Interest Margins (NIMs) as the Reserve Bank of India (RBI) recently cut its benchmark repo rate for the first time in nearly five years, ANI reported on Friday, citing financial data firm SP Capital IQ. According to the report, NIMs at six major banks have come under stress as deposit rates have caught up with lending rates. However, strong credit demand has helped sustain growth. Loan growth offsets margin decline In the October-December quarter of FY24, five of India’s six largest banks recorded loan growth exceeding 12%, boosting net income, the report said. The State Bank of India (SBI), India’s largest lender, saw its NIM shrink by 17 basis points to 2.86%, even as its credit growth remained strong at 14%, driven by retail, agriculture, MSME, and corporate loans. Deposit growth lags as customers shift to fixed deposits Despite expanding their loan books, banks are facing slower deposit growth as customers move funds from low-yield savings accounts to high-interest fixed deposits, increasing banks’ funding costs, ANI reported, citing SP. SBI's deposit growth stood at 10% in Q3 FY24, while its low-cost Current Account and Savings Account (CASA) share dropped from 38.4% to 37.6%. SBI Chairperson Challa Sreenivasulu Setty described this shift as a “behavioral change” affecting margins. More rate cuts expected in 2025 On January 27, the RBI introduced liquidity measures to support the banking system, followed by a 25-basis-point rate cut to 6.25% on February 7. Analysts at Nomura expect additional rate cuts in 2025, with the next likely in April and a terminal rate of 5.50% by year-end. With deposit rates still high due to tight liquidity conditions, borrowers are expected to push for lower lending rates, which could put further pressure on banks’ margins. Rising competition in the banking sector According to a Goldman Sachs cited by ANI, intense competition for deposits is limiting banks’ ability to expand loan yields. Other state-owned banks have also seen margin declines, with Bank of Baroda’s NIM falling by 20 basis points to 2.93%, while Punjab National Bank’s margin dropped by 19 basis points to 2.67%. With continued pressure on NIMs, banks may need to rethink their deposit and lending strategies to maintain profitability, the report noted.