State-owned lenders have witnessed a sharper decline in the yield on advances compared to their private peers during the first quarter of the current financial year, according to the Moneycontrol’s analysis.
Private banks managed loan yields by way of diversified portfolios but their business growth was affected by high credit-to-deposit ratios. In contrast, state-owned lenders with more room for lending saw yield compress from lower returns on retail loans and reduced exposure to high-yield segments like NBFCs and unsecured credit, analysts said.
According to data compiled by Moneycontrol, yield on advances for PSU banks dropped by 15–71 basis points (bps), significantly more than the 12–30 bps reduction observed for private banks.
“Private banks have been able to manage their yields on advances supported by a diversified loan portfolio,” said Sanjay Agarwal, Senior Director at CareEdge Ratings. “PSU banks, on the other hand, with their lower credit-to-deposit (CD) ratios, had more headroom for growth but experienced yield compression due to a shift away from riskier high-yield segments.”
He further noted that repricing of the corporate loan book took place as corporates negotiate lower rates after the repo rate cuts by the Reserve Bank of India (RBI) or explore the capital market due to lower yields.
In the PSU banking space, IDBI Bank saw a reduction in yield on advances by 71 bps on-year in Q1FY26, followed by 59 bps of Bank of India, 38 bps of Bank of Baroda, and 32 bps of Bank of Maharashtra.
Similarly, in the private banking space, the highest reduction of 30 bps each was seen by YES Bank, HDFC Bank, and South Indian Bank. This was followed by 27 bps and 12 bps of ICICI Bank and Karur Vysya Bank, respectively.
Analysts said that banks are seeing their margins being pressured in the first quarter of the current fiscal year due to subdued business growth, faster transmission of lending rate cuts, along with a lag in deposit repricing and reduced offtake from high-yield segments like NBFCs, and unsecured personal loans.
As per a CareEdge report, net interest margins (NIM) declined by 18 bps year-on-year in Q1FY26. Private banks and PSUs' NIMs declined by 16 bps and 21 bps on-year, respectively, due to subdued credit growth particularly in the corporate and unsecured segment.
Looking ahead, NIMs are expected to remain under pressure unless there is a material shift toward higher-yielding loans or a correction in deposit costs in the latter half of the year, analysts said.
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