PSB Margins Face Headwinds in FY27
Margins of public sector banks (PSBs) are likely to remain under pressure in FY27, as private banks have transmitted policy rate cuts more effectively on fresh loans compared to PSBs, according to a report by Dolat Capital.
Following the repo rate cut, private banks passed on a greater reduction in lending rates, transmitting 108 basis points on fresh loans compared to 66 basis points for PSBs. Meanwhile, PSBs reduced deposit rates slightly more than private banks, with PSBs transmitting 53 basis points on outstanding and 74 basis points on fresh deposits, while private banks transmitted 46 basis points on outstanding and 73 basis points on fresh deposits.
Widening Credit-Deposit Ratio Gap
The report noted that the credit-deposit (CD) ratio gap has widened by over 500 basis points, reflecting tighter liquidity conditions in the banking system. However, concessional measures by the Reserve Bank of India (RBI) aimed at subsidising hedging costs are expected to support foreign currency non-resident (banking) FCNR(B) inflows. "This, coupled with a high lending base for 2H (1H'26 growth of 10% y-y vs 16% in FY26) will help to bridge the gap, in our view," the report stated.
Credit Growth Drivers
On credit growth drivers, the report highlighted strong lending momentum to non-banking financial companies (NBFCs), small and medium enterprises (SMEs) and corporates, aided by higher treasury yields. Sectors such as metals, which grew 21% year-on-year, and power, up around 24%, have shown robust traction. However, the impact on incremental credit growth needs to be monitored given any material decline in yields.
Noting the correction in gold loan prices by around 15% levels since March 2026, the report said, "There can be some decline in growth from current levels. Trends here remain a key monitorable."
Deposit Rate Outlook
Highlighting the current challenges in mobilising retail deposits, Dolat Capital said a significant further reduction in deposit rates appears unlikely. "However, given the lower yield transmission, PSBs can continue to face margin pressures in FY27," it added.
