Notwithstanding the solid performance of banks during the last three years, they could face some pressure in the near term on the net interest margin (NIM) and credit growth fronts, according to an assessment carried in a joint report by all financial sector regulators.

The semi-annual Financial Stability Report (FSR) cautioned that easing monetary policy cycle could impact the NIM, as growing share of loan book is linked to the external benchmark-based lending rate (EBLR), which is reset more frequently with change in repo rate.

On the other hand, term deposits, which are also growing, have fixed contractual rates that change less frequently. The recent 100-basis-point (bp) cut in CRR (from 4 per cent to 3 per cent), however, will cushion this impact by releasing funds for banks and reducing their costs.

The FSR underscored that credit growth has slowed, and credit impulse (the change in new credit issued as a percentage of GDP) has turned negative.

“Economic slowdown, if any, amidst heightened uncertainty could drag credit demand lower, which may impact asset quality and profitability; and banks’ liability profile is changing with the share of higher-cost term deposits and CDs (certificate of deposits) growing compared to low-cost current account and savings account (CASA) deposits,” the report said.

Unsecured retail lending

The FSR highlighted that even as unsecured retail lending has moderated – it forms 25 per cent of retail loans and 8.3 per cent of gross advances – its asset quality has relatively weakened compared to the overall retail portfolio, (gross non-performing asset ratio at 1.8 per cent vis-à-vis 1.2 per cent in March 2025) especially in respect of private sector banks (PVBs).

On the other hand, the SMA (special mention account), an indicator of possible stress build-up in loan book, has risen, led by public sector banks (PSBs).

“Slippages in unsecured retail loans remain elevated for PVBs. Fresh slippage in unsecured retail loans continues to dominate the overall slippage in retail loan segment with PVBs’ contribution significantly higher among bank groups,” stated the report.

Alongside, write-offs continue to remain a key contributing factor to NPA (non-performing asset) reduction in the unsecured retail portfolio, especially among PVBs.

Published on June 30, 2025