New Delhi, Jul 14, 2025 : Net interest margins (NIMs) of Indian banks are projected to bottom out by the third quarter of FY26 (3QFY26) and begin a gradual recovery thereafter, according to a recent report by Motilal Oswal Financial Services.
While investor sentiment remains divided on the duration of the current margin softness, the report suggests that well-managed and larger banks are best positioned for an early rebound. “Banks are likely to see NIMs bottom out by 3QFY26, followed by a gradual recovery thereafter,” the report stated.
The contraction in NIMs is largely attributed to the ongoing rate cut cycle. Banks with a higher share of floating-rate loans—particularly those linked to the repo rate—are feeling immediate pressure on asset yields. However, deposit costs are also expected to ease over time, albeit with uncertain repricing dynamics.
The report pointed to a likely earnings inflection point in the sector, projecting improved profitability from the second half of FY26, despite some earnings softness expected in the first and second quarters.
It added that while the banking sector may witness near-term consolidation, the medium-term outlook remains positive—supported by stabilizing margins, steady loan growth, and healthy asset quality.
Motilal Oswal expressed preference for banks with strong deposit franchises and sound risk management. It also noted that normalization of credit costs in unsecured lending, an improved asset mix, and better treasury performance would help maintain robust Return on Assets (RoA) amid macroeconomic and rate-related headwinds.
