Mumbai: The average fresh loan spread of Indian banks increased by 17 basis points to 3.09% in May, indicating lenders' focus on protecting margins, according to data released by the Reserve Bank of India (RBI).
Private sector banks led the increase, widening spreads-the difference between the average lending rate they charge on borrowers and their cost of funds-by 34 basis points to 3.86%, while public sector banks raised spreads by 6 basis points to 1.79%, RBI data showed.
The data, experts said, reflects a cautious stance by banks toward aggressive credit expansion amid persistent pressure on lending margins even as the central bank has cut repo rates-the rate at which it lends to banks-by 100 basis points since February, including 50 bps cut in early June.
"In May 2025, banks witnessed an increase in spreads amid ongoing rate transmission, with fresh spreads remaining above outstanding spreads, reflecting the lag in repricing existing loans," said Sanjay Agarwal, senior director at CareEdge Ratings. "The demand for retail credit is subdued, and there is lower enthusiasm among banks to support credit growth, owing to margin pressures," he added.
As of May, outstanding lending rates across banks dipped marginally by 1 basis point month-on-month to 9.67%, RBI data showed. Public sector banks saw a decline of 2 basis points to 9%, while private sector banks witnessed a 2-basis point increase to 10.65%.
Fresh lending rates eased by 6 basis points on month to 9.20% in May, driven by surplus liquidity conditions and the transmission of policy rate cuts.
Analysts point to the structure of bank loan portfolios as a key reason for the slow and uneven rate transmission, citing the mix of credit portfolios across fixed and floating interest rate structures and varied spreads charged by banks.
A significant share of loans is still benchmarked to the marginal cost of funds-based lending rate (MCLR), which has longer reset cycles, slowing the pace of policy pass-through.
As of end-March 2025, 61.6% of total outstanding floating rate rupee loans were linked to the external benchmark-based lending rate (EBLR), while 34.9% were tied to the MCLR.
On the funding side, banks' outstanding deposit rates fell by 4 basis points to 7.07% in May, as policy-driven easing, surplus liquidity, and repricing of deposit portfolios exerted downward pressure. Fresh deposit rates saw a sharper decline of 23 basis points to 6.11% in May.
Net interest margins (NIMs) have been on a declining trend, with system-wide NIMs falling to 3.5% as of March 2025. Private sector banks reported NIMs of 4.1% in March, while public sector banks stood at 3%.
"Despite front-loading of rate cuts, we expect margin compression to be limited in this cycle, given the sharp reduction in savings and term deposit rates by banks relative to lending rates," said Suresh Ganapathy, head of financial services research at Macquarie Capital.
Private sector banks led the increase, widening spreads-the difference between the average lending rate they charge on borrowers and their cost of funds-by 34 basis points to 3.86%, while public sector banks raised spreads by 6 basis points to 1.79%, RBI data showed.
The data, experts said, reflects a cautious stance by banks toward aggressive credit expansion amid persistent pressure on lending margins even as the central bank has cut repo rates-the rate at which it lends to banks-by 100 basis points since February, including 50 bps cut in early June.
"In May 2025, banks witnessed an increase in spreads amid ongoing rate transmission, with fresh spreads remaining above outstanding spreads, reflecting the lag in repricing existing loans," said Sanjay Agarwal, senior director at CareEdge Ratings. "The demand for retail credit is subdued, and there is lower enthusiasm among banks to support credit growth, owing to margin pressures," he added.
As of May, outstanding lending rates across banks dipped marginally by 1 basis point month-on-month to 9.67%, RBI data showed. Public sector banks saw a decline of 2 basis points to 9%, while private sector banks witnessed a 2-basis point increase to 10.65%.
Fresh lending rates eased by 6 basis points on month to 9.20% in May, driven by surplus liquidity conditions and the transmission of policy rate cuts.
Analysts point to the structure of bank loan portfolios as a key reason for the slow and uneven rate transmission, citing the mix of credit portfolios across fixed and floating interest rate structures and varied spreads charged by banks.
A significant share of loans is still benchmarked to the marginal cost of funds-based lending rate (MCLR), which has longer reset cycles, slowing the pace of policy pass-through.
As of end-March 2025, 61.6% of total outstanding floating rate rupee loans were linked to the external benchmark-based lending rate (EBLR), while 34.9% were tied to the MCLR.
On the funding side, banks' outstanding deposit rates fell by 4 basis points to 7.07% in May, as policy-driven easing, surplus liquidity, and repricing of deposit portfolios exerted downward pressure. Fresh deposit rates saw a sharper decline of 23 basis points to 6.11% in May.
Net interest margins (NIMs) have been on a declining trend, with system-wide NIMs falling to 3.5% as of March 2025. Private sector banks reported NIMs of 4.1% in March, while public sector banks stood at 3%.
"Despite front-loading of rate cuts, we expect margin compression to be limited in this cycle, given the sharp reduction in savings and term deposit rates by banks relative to lending rates," said Suresh Ganapathy, head of financial services research at Macquarie Capital.
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