Slowing credit growth, margin pressure may weigh on banks

In 2025 banks are in for challenges such as pressure on margins and slowing credit growth.

- SUBRATA PANDA & AATHIRA VARIER

With the likelihood of a repo rate cut in February or April, external benchmark-linked loans of banks will be repriced immediately.

However, deposit rates are expected to adjust more gradually, which could impact the net interest margin (NIM) – a key measure of profitability for banks.

According to experts, private banks could be impacted more owing to this because they have a larger share of external benchmark-linked loans.

"An interest rate cut could give banks some breathing room, especially in terms of reducing funding costs, and deposit rates may not fall proportionally, meaning raising deposits could remain costly, which would put continued pressure on the NIM," said Dolphy Jose, executive director, South Indian Bank.

Resource mobilisation was a key challenge for banks for the last two years, because deposit growth lagged a credit uptick. In the last month, however, with credit growth slowing significantly, the gap has closed.