State-run lenders are seeing faster growth in net interest income as funding costs rise more sharply for private banks, whose margins remain under pressure from competition for deposits.
State-run banks in India appear to be gaining an edge on profitability as private lenders contend with rising funding costs, according to the latest data on margins and deposit pricing. The gap is most visible in net interest margin, or NIM, the difference between what banks earn on loans and what they pay on deposits and other funding. Large private banks saw their NIM slip by 1 basis point sequentially and 12 basis points year on year to 3.33%, while smaller private lenders posted a 9 basis point quarterly improvement to 3.06%, reflecting a more mixed picture across the industry.
The pressure on private banks is being driven by a faster rise in deposit and other funding costs than in lending yields. According to the figures in the report, state-run lenders lifted lending yields by 18 basis points in the latest quarter while funding costs rose by 9 basis points. Private banks, by contrast, recorded only a 6 basis point increase in lending yields, but funding costs climbed by 14 basis points. That spread has helped public-sector banks preserve or expand margins at a time when many private lenders are paying up for deposits to sustain loan growth.
The earnings trend broadly follows that divergence. Net interest income at selected state-run banks increased 18.4% from a year earlier in the second quarter of FY27, ahead of 14.4% growth among private banks. Interest income from loans and advances also rose faster at state-run lenders, increasing 15.3% compared with 14.1% for private peers. The figures suggest that the relative advantage is not just a matter of accounting margins, but is feeding through to core income as well.
The outlook may improve further for banks that are more heavily exposed to floating-rate lending. A 25 basis point repo-rate increase could support margins in the third quarter because repo-linked loans tend to reprice more quickly than deposits. Even so, large private banks may continue to face funding pressure from foreign currency non-resident bank deposits, or FCNR(B) deposits, which can add to costs when banks compete for stable liabilities. The pattern echoes a broader banking trend seen in other markets: the Federal Deposit Insurance Corporation reported that U.S. bank margins also improved in late 2025 as asset yields rose faster than funding costs, underlining how sensitive profitability remains to the pace of rate transmission.
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