Banks to Face Funding Cost Pressure in Q4, Margins to Remain Rangebound

Indian Banks Expected to Post Stable March Quarter Amid Rising Funding Costs

Indian banks are anticipated to report a stable March quarter, driven by strong asset quality and loan growth. However, funding costs are likely to be a point of contention during the quarter, despite a 125 basis point cut by the Reserve Bank of India (RBI), while deposit growth continues to lag credit growth.

The Reserve Bank of India's recent data suggests that loan growth has risen 13.6 percent as of mid-March, while deposit growth has only ticked up about 11 percent in the same period. This has resulted in a credit-deposit ratio of 83 percent as at the end of 9MFY26.

Credit Growth Outpaces Deposit Growth

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Credit growth has outpaced deposit growth in the last multiple quarters. The gap between credit growth and deposit growth is largely driven by a sharp increase in the cost of funds. The funding cost in a bank refers to the rate at which banks incur to run their loan business. A lower fund cost allows banks to offer competitive interest rates on loans, while a higher cost can lead to margin pressure in banks.

One prime reason why the gap exists is that more people are turning towards alternative savings instruments such as the equity market and mutual funds, in search of higher returns, which has now put low-cost and term deposits under jeopardy. As a result, banks are now turning towards bulk or term deposits (TDs) to make up for the gap. While TDs have shown a healthy growth in the third quarter of FY26, this has come at the cost of softer current account-savings account (CASA) deposit mobilisation, which has driven CASA ratios lower.

Rising Funding Costs

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Short-term borrowing instruments such as Certificates of Deposit (CDs) have found newfound success with banks. Low-cost bank deposits, such as CASA, have fallen to a two-year low in the December quarter, according to data from the central bank. Additionally, the transmission of the 125 bps rate cuts has not been fully percolated in the banking system, according to RBI governor Sanjay Malhotra.

Flat Margins Ahead

Tight deposit conditions and rising funding costs can hurt banks' net interest margins in the near-term, according to multiple analysts. Several private banks, namely HDFC Bank and ICICI Bank, are likely to report flat margins for the fourth quarter, while others, such as Axis Bank and Kotak Mahindra Bank, are likely to see a decline in NIMs for Q4. Federal Bank, on the other hand, could be an outlier here as they are likely to report a one-time impact of Rs 1,500 crore in tax refunds.

Amongst the public sector banks, State Bank of India (SBI), Bank of Baroda (BoB), and Union Bank of India (UBI) will report flat margins for the quarter, while others, such as Bank of India (BoI), will report slightly lower margins for the quarter, according to multiple analysts.

Management commentary on NIM movement over H1FY27 remains critical, and we expect NIM trajectory to remain an integral part of the Q4 discussions.