Banks in India are expected to see the return on assets (RoA) moderate by 10-20 basis points (bps) to 1.1-1.2 per cent this fiscal from an over-two-decade peak of around 1.3 per cent in fiscals 2024 and 2025, stated a report by Crisil Ratings. This, it added, will be driven by a similar contraction in their net interest margins (NIMs), as interest rates on loan assets are likely to reduce faster than those on deposit liabilities in a falling interest rate environment.
Besides NIMs, Crisil maintained, credit costs also have a bearing on bank earnings. While a secular decline in credit costs has supported profitability in the past few years, Crisil said, they have bottomed out. With other income and operating expenses, which are the other major components of earnings, seen flat, the brokerage firm said that the compression in NIM will directly translate to a moderation in RoA after accounting for the tax impact. Now, the overall profitability is expected to remain above the 20-year sectoral average of around 0.8 per cent (~0.6 per cent in the past decade).
Subha Sri Narayanan, Director, Crisil Ratings, said, “Of the loan assets, ~45 per cent are linked to an external benchmark, primarily repo. Typically, these are repriced rapidly after rate cuts. On the other hand, any reduction in term deposit (TD) rates will apply only to incremental deposits and renewals, resulting in a slower transmission of the reduction to the liability side. Data shows only ~21 per cent of TDs are maturing in a year, which means the rest will be due for repricing only after this fiscal.”
The extent of reduction in NIMs, Crisil said, will depend on the ability of banks to manage their deposit costs. But given the competition for deposits seen of late, that ability will be curtailed.
Nevertheless, recent developments should ease the pressure on banks to some extent. One, the Reserve Bank of India has stated it will maintain adequate systemic liquidity. This will ensure adequate liquidity and support deposit growth. Two, the liquidity coverage ratio of banks should improve by 6 percentage points following the revised norms issued last week. While the benefit will kick in from April 1, 2026, it will allow banks with an already comfortable liquidity cushion the leeway to redirect funds towards loan growth rather than low-yielding liquid investments.
Vani Ojasvi, Associate Director, Crisil Ratings, said, “Some banks have now cut their TD rates in the 15–24- month maturity bucket and stopped higher rate special deposit schemes. A few large ones have reduced not only the TD rates but also their savings account rates. While a cut in the savings account rates is applicable to all outstanding balances, the reduced TD rates are applicable only on fresh deposits and renewals. If all banks were to implement a 25 bps cut in their savings account rates, it would, ceteris paribus, result in a 6-7 bps NIM benefit this fiscal. A similar cut in the TD rates would yield an ~4 bps NIM benefit.”
It is worth noting that the ability of each bank to cut its deposit rates and the strategy followed would depend on an interplay of factors such as its own credit-deposit ratio, liquidity coverage ratio, share of external benchmark-linked loans, NIM levels and growth aspirations.
Overall, per Crisil, bank NIMs will see a 10-20 bps compression to 2.8-2.9 per cent in fiscal 2026.
Regarding credit costs, in the last fiscal year, while NIMs declined slightly, they also dropped by around 10 basis points, which helped cushion profitability. Combined with comparable savings in operating expenses, this helped maintain stable return on assets (RoAs).
Per the findings of the report, this fiscal, gross non-performing assets (NPAs) are seen rangebound at 2.4-2.6 per cent by March 2026, as against 2.4 per cent as on March 31, 2025. Corporate NPAs would remain low on strengthened underwriting and risk management of banks, and robust balance sheets of corporates themselves. However, in retail and some MSME segments, borrower over-leveraging bears watching. Hence, while a sharp uptick in NPAs is not expected, credit costs are unlikely to reduce further.
Other income, excluding trading gains, is expected to stay stable. Crisil said that its core profitability projections do not account for trading or mark-to-market gains or losses. Typically, banks benefit from strong trading profits in a declining interest rate environment, but this is unlikely to offer much support now due to the new investment regulations that took effect on April 1, 2024.