A Dolat Capital report suggests PSB margins will likely be pressured in FY27. Private banks have passed on more of the repo rate cut on fresh loans (108bps) than PSBs (66bps), while PSB deposit rate transmission was slightly higher.
Margins of public sector banks (PSBs) are likely to remain under pressure in FY27, as private banks have transmitted policy rate cuts more effectively on fresh loans compared to PSBs, as per a report by Dolat Capital.
Disparity in Rate Transmission
According to Dolat Capital, following the repo rate cut, private banks have passed on a greater reduction in lending rates, transmitting 108 basis points on fresh loans compared to 66 basis points for public sector banks (PSBs), while reducing deposit rates slightly less than PSBs. PSBs have transmitted marginally more on deposits. They have transmitted "53bps on outstanding and 74bps on fresh, while private banks have transmitted 46bps on outstanding and 73bps on fresh deposits," the report said.
Liquidity and CD Ratio Gap
Apart from this, the report noted that the credit-deposit (CD) ratio gap has widened by over 500 basis points, which further reflects tighter liquidity conditions in the banking system. However, concessional measures by the Reserve Bank of India (RBI) aimed at subsidising hedging costs are expected to support foreign currency non-resident (banking) FCNR(B) inflows. "This, coupled with a high lending base for 2H (1H'26 growth of 10% y-y vs 16% in FY26) will help to bridge the gap, in our view."
Key Credit Growth Drivers
On credit growth drivers, the report highlighted strong lending momentum to non-banking financial companies (NBFCs), small and medium enterprises (SMEs) and corporates, aided by higher treasury yields. Sectors such as metals, which grew 21 per cent year-on-year, and power, up around 24 per cent, have shown robust traction. However, the impact on incremental credit growth needs to be monitored given any material decline in yields, as per the report.
Potential Risks and Outlook
Noting the correction in the gold loan prices by ~15% levels since Mar'26, it said, "There can be some decline in growth from current levels. Trends here remain a key monitorable."
Highlighting the current challenges in mobilising retail deposits, Dolat Capital said a significant further reduction in deposit rates appears unlikely. "However, given the lower yield transmission, PSBs can continue to face margin pressures in FY27," it added. (ANI)
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