Banks’ NII Growth Slows to 2.9% in Q2 as Margin Pressure Mounts

India’s scheduled commercial banks (SCBs) reported a moderation in growth of their net interest income (NII) to 2.9 per cent year-on-year (YoY) during the second quarter of the financial year 2025-26 in comparison to 3.5 per cent from the previous year. The slowdown reflects a narrowing of net interest margins (NIMs) as the drop in lending yields outpaced easing in funding costs.

While private banks recorded a relatively higher NII growth of 3.4 per cent YoY, public banks reported a modest increase of 2 per cent, according to a report by CareEdge Ratings. The incremental growth in interest income was limited by lower yield on advances, driven by repricing loans in line with benchmark rate cuts and exposure to lower-yielding loans despite steady credit growth. 

In Q2 FY26, interest income of SCBs grew by 2.3 per cent YoY with private banks rose by a modest 0.3 per cent, while public sector banks grew at 6.3 per cent. Sequentially, NII for SCBs saw a marginal increase of 0.5 per cent during the second quarter. Among SCBs, private banks reported a relatively smaller uptick of 0.3 per cent, while public sector banks registered an increase of 0.9 per cent.

The NIM for SCBs during the second quarter had dropped by 21 basis points (bps) to 3.13 per cent from 3.34 per cent during Q2 FY25, reflecting margin compression across the board. Private and public sector banks reported a decline of 17 bps and 27 bps, respectively, as yields declined due to transmission of rate cuts, whereas deposit repricing is still underway, the report noted.

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This timing mismatch between loan yields and deposit costs continued to weigh on spreads. Moreover, competitive pressure in the home-loan segment has increased, especially as many public sector banks appear to have reduced rates, including via faster pass-through of external benchmark-based lending rate (EBLR)-linked loans, which has placed additional strain on NIMs.

Importantly, the current accounts-savings accounts (CASA) ratio for banks had moderated to 37.4 per cent in Q2 FY26 from 38.5 per cent in Q2 FY25, while term deposits grew by 12 per cent in the current quarter. 

However, despite a moderation in CASA inflows, the shift toward higher-yielding term deposits and alternative investment avenues reflects customers’ preference for optimised returns amid ongoing deposit repricing, the report said. 

Moreover, while retail CASA accretion remained modest, banks continued to maintain a healthy funding base, supported by sustained liquidity in the system.