NIM Pressure: 2026 is proving to be a double-edged sword for the Indian banking sector. While credit growth is growing at a rate of 12-15%, the increasing pressure on net interest margins (NIM) is causing sleepless nights for bank managers. The latest Q3 FY26 results have made it clear that increasing competition for deposits and a surge in deposit costs have put banking margins under a tight squeeze.

Why is the market nervous

The biggest challenge facing the banking system at the beginning of 2026 is the imbalance in the credit-deposit (C-D) ratio. Deposits are not coming in as fast as banks are disbursing loans. As a result, banks are having to maintain high fixed deposit (FD) rates to raise funds.

According to recent RBI data, deposit growth in the system (~9.5%) is lagging far behind loan growth (~13-14%). Furthermore, customers are shifting from savings accounts (CASA) to higher-interest term deposits or mutual funds. This has increased banks’ funding costs, leading to a narrowing of the NIM (Non-Residential Incentive) gap between loan interest and deposit interest.

Which banks are handling this

Despite the pressure, some major banks have held their ground thanks to their strong liability franchises:

Kotak Mahindra Bank and ICICI Bank

These two banks appear to be leading the charge. Kotak’s NIM remains around 4.5%, the best in the industry. ICICI Bank has also managed to maintain its margins at 4.3%, thanks to its digital ecosystem and low-cost CASA base.

State Bank of India

The country’s largest bank reported a record profit of ₹21,028 crore in Q3 FY26. Although its domestic NIM fell marginally to 3.12%, its large deposit and corporate loan book have enabled it to withstand pressure.

HDFC Bank

Following the merger, the bank is still adjusting its loan-to-deposit ratio. Its NIM is close to 3.5%, and the bank’s focus is now on profitability, not just market share.

Will there be an improvement by the end of 2026

HDFC Bank

Experts believe the situation may improve in the latter half of 2026. According to a report by Elara Capital and Fitch Ratings, margins will begin to stabilize as old deposits are repriced at new rates and the impact of previous rate cuts by the RBI fully permeates the system. Banks have now shifted their focus to increasing non-interest income to offset the shortfall in interest margins.

Vigilance is the key to safety

In 2026, “deposits are king” for the banking sector. Banks with unwavering customer trust and low-cost funding will emerge victorious in this margin war. Investors should bet on banks with strong CASA ratios and those that have successfully reduced their operating costs through technology.

About the Author