PSB margins likely to stay under pressure in FY27, amid weaker loan rate transmission: Report
New Delhi, July 2
Margins of public sector banks are likely to remain under pressure in FY27, as private banks have transmitted policy rate cuts more effectively on fresh loans compared to PSBs, as per a report by Dolat Capital.
According to Dolat Capital, following the repo rate cut, private banks have passed on a greater reduction in lending rates, transmitting 108 basis points on fresh loans compared to 66 basis points for public sector banks (PSBs), while reducing deposit rates slightly less than PSBs.
PSBs have transmitted marginally more on deposits. They have transmitted "53bps on outstanding and 74bps on fresh, while private banks have transmitted 46bps on outstanding and 73bps on fresh deposits," the report said.
Apart from this, the report noted that the credit-deposit (CD) ratio gap has widened by over 500 basis points, which further reflects 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."
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 per cent year-on-year, and power, up around 24 per cent, have shown robust traction.
However, the impact on incremental credit growth needs to be monitored given any material decline in yields, as per the report. Noting the correction in the gold loan prices by ~15% levels since Mar'26, it said, "There can be some decline in growth from current levels. Trends here remain a key monitorable."
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.
— ANI
Reader Comments
But don't forget PSBs also serve rural areas and small borrowers where private banks don't go. Margin pressure is real, but the government also needs to support them with capital. Otherwise, social banking goals will suffer. Credit growth to SMEs and power sector is good news though.
Interesting data from Dolat Capital. The 108bps vs 66bps transmission gap on fresh loans is significant. But the CD ratio widening by 500bps is concerning. RBI's FCNR(B) hedging cost subsidy might help, but it's a temporary fix. Hope PSBs focus more on core profitability rather than just volume growth.
Honestly, as a customer of SBI, I've seen them reduce loan rates but very slowly. They keep telling us 'system issue' or 'manual intervention needed'. Private banks like HDFC update rates almost instantly. PSBs need digital transformation urgently. This report only highlights what we see on ground level. 💻
Good points on NBFCs and SMEs driving credit growth. But the gold loan correction by 15% since March is worrying - many PSBs have heavy gold loan portfolios. If gold prices fall further, NPA risks may rise. RBI's hedging subsidy for FCNR is smart though - helps attract foreign deposits to ease liquidity crunch.
Main problem is PSBs are too slow in decision making. Private banks have low cost deposits with better technology, so they can offer lower rates. Also, PSBs have legacy systems and high employee costs. Unless they modernize, margin pressure will continue. FY27 looks challenging for them, as the report says. 😔