Indian banks are aiming to improve their net interest margins in the second half of fiscal year 2027 by repricing loans. After facing profit margin pressure in the recent second quarter, lenders are now focusing on passing on higher interest costs to borrowers to help restore profitability.
Indian banks are preparing for a potential improvement in their profit margins during the second half of the 2027 fiscal year. After a difficult second quarter, where lenders like HDFC Bank reported interest margins as low as 3.16%, banks are now shifting their focus to stabilizing earnings by adjusting the interest rates they charge on loans.
Net interest margin is essentially the difference between the interest a bank earns on loans and the interest it pays to depositors. During the recent quarter, banks struggled with higher funding costs due to a large accumulation of foreign currency deposits, which took time to deploy into the domestic market. When the cost of these deposits rises faster than the income from loans, the bank's profit margin shrinks.
Banks are now using recent interest rate changes as a tool to recover these margins. By increasing the rates on loans that are linked to variable benchmarks, banks can effectively pass on costs to borrowers. HDFC Bank, which faced significant margin pressure recently, has indicated that it expects a turnaround in profitability starting in the third quarter. However, the path to recovery differs among private lenders. Axis Bank is focusing on a gradual improvement by using its liquidity to retire expensive deposits, while ICICI Bank remains more conservative, projecting that a clearer recovery might only be visible by the fourth quarter of the fiscal year. Yes Bank is also attempting to boost its margins by deploying idle funds and reducing its exposure to low-yield rural infrastructure bonds.
Public sector banks have shown more stability throughout this period. Punjab National Bank saw its margin move to 2.56% from 2.5% in the previous year and is targeting a further improvement of 6 to 7 basis points in the upcoming quarter. Similarly, Canara Bank is relying on the aggressive repricing of loans linked to standard benchmark rates to maintain its current performance level.
While the industry outlook for the second half of FY27 is generally optimistic, risks remain. If the cost of deposits stays high for longer than expected, it could prevent margins from rising as quickly as banks have predicted. For investors, the key monitorable will be the upcoming quarterly results. Watching how effectively these banks manage the balance between increasing loan rates and retaining customer deposits will be critical to understanding whether this margin recovery can be sustained.