Banks' Secret Weapon: New Loan Yields Spike Amidst Rate Cuts, Deposit Costs Plunge! Profit Boost Incoming?

Banks in India are navigating a complex interest rate environment, with recent data revealing a notable divergence in lending and deposit rates.

Lending Rate Trends

In October, the weighted average lending rate (WALR) on outstanding loans saw a modest decrease of 4 basis points compared to September. However, this trend was sharply contrasted by an increase in yields on fresh bank loans, which rose by 14 basis points over the same period. This occurred even as the Reserve Bank of India (RBI) had previously implemented a 100 basis points cut in its policy rates.

• Private sector banks observed a 12 basis points increase in WALR on fresh loans in October against September.
• State-owned banks recorded a slightly lower rise of 9 basis points in the same category.
• Over the last three months, the banking sector as a whole has seen a decline of 17 basis points in WALR on fresh loans.

Deposit Rate Movements

Concurrently, banks have been reducing their deposit costs. The weighted average term deposit rate (WATDR) declined by 5 basis points for private banks and 4 basis points for public sector banks in October when compared to September.

Profitability Outlook

Analysts at Motilal Oswal suggest that this rate dynamic is favorable for banks' profitability. With most of the interest rate repricing linked to the RBI's repo rate now complete and the Marginal Cost of Funds based Lending Rate (MCLR) easing gradually, banks are repricing new loans at higher yields. This strategy is expected to help sustain their Net Interest Margins (NIMs), especially as the phase of downward repricing for existing loans is largely behind them.

Future Expectations

The benefits from the repricing of term deposits are expected to become more pronounced in the second half of the fiscal year 2026 (H2 FY26). As the WATDR continues its downward trend, banks should see a reduction in their overall cost of funds.

Impact

• For Borrowers: New borrowers might face slightly higher interest rates on fresh loans in the short term, despite overall rate cut cycles.
• For Banks: The increase in fresh loan yields and decrease in deposit rates is a positive sign for Net Interest Margins (NIMs) and overall profitability.
• For Investors: This trend indicates improved earning potential for banking stocks, potentially boosting investor sentiment.

Impact Rating (0–10): 8

Difficult Terms Explained

• Weighted Average Lending Rate (WALR): The average interest rate that banks charge on all loans, weighted by the amount of each loan.
• Weighted Average Term Deposit Rate (WATDR): The average interest rate that banks pay on all term deposits, weighted by the amount of each deposit.
• Basis Points (bps): A unit of measure used in finance to describe small changes in interest rates or other percentages. 100 basis points equal 1 percent.
• Reserve Bank of India (RBI): India's central bank, responsible for monetary policy and regulating the banking system.
• Net Interest Margins (NIMs): The difference between the interest income generated by a bank and the interest paid out to its depositors, expressed as a percentage of its interest-earning assets. It's a key measure of bank profitability.
• Marginal Cost of Funds based Lending Rate (MCLR): The internal benchmark rate that banks use to set interest rates on loans, introduced by the RBI.
• H2 FY26: The second half of India's fiscal year 2026, typically covering January to March 2026.