India’s banking sector is expected to report steady net interest margins (NIMs) in the third quarter, supported by sustained loan growth and easing funding costs, according to sector analysts. While yields on advances continue to soften following recent policy rate cuts, this pressure is likely to be offset by the delayed benefit of lower term deposit rates and gains from reductions in the cash reserve ratio (CRR).
Profitability across banks is forecast to improve on a year-on-year basis, driven by consistent growth in advances, stronger fee income and lower credit costs. Stress in the unsecured lending segment has shown signs of moderation, helping to stabilise asset quality. Analysts expect this trend to continue, with further normalisation in slippages over the coming quarters.
Data from the Reserve Bank of India (RBI) shows that banking system advances grew by 4.5% quarter-on-quarter and 11.7% year-on-year as of mid-December 2025. Industrial credit growth strengthened, led by a sharp rise in lending to micro and small enterprises. Large industry loans also saw an improvement, while services and retail credit maintained healthy momentum. Vehicle loans and other personal loans recorded faster growth, although credit card lending slowed further.
Deposit growth, however, continued to trail advances. System-wide deposits rose by 2.3% sequentially and 9.7% annually, leading to an increase in the credit-deposit ratio to 81.1%. Despite this, liquidity conditions have remained largely comfortable, supported by surplus system liquidity and higher issuance of certificates of deposit during the quarter.
Margins are expected to broadly stabilise in the third quarter as banks begin to benefit from the repricing of existing term deposits. While savings account rate cuts had an immediate impact earlier, the lagged repricing of fixed-rate deposits is now starting to reduce funding costs. The spread between lending and deposit rates has shown marginal improvement, indicating stability in margins across both public and private sector banks.
Fee income is projected to grow sequentially, in line with improving loan growth. However, treasury gains are likely to decline as government bond yields rose modestly during the quarter. Operating expenses are expected to remain stable, with employee costs largely absorbed in the previous quarter following annual wage revisions.
On asset quality, unsecured loan slippages are expected to remain contained, while agricultural loans may see seasonal stress, as is typical in the first and third quarters. Overall recoveries and upgrades are anticipated to stay healthy.
Taken together, aggregate profitability for the covered banks is expected to rise year-on-year in the third quarter, although sequential growth is likely to remain flat. Analysts see this as a turning point after a weak second quarter, signalling improving earnings momentum for the banking sector.
