Mumbai

Net interest margin (NIM) pressure on Indian banks may be close to easing, with margins likely to stabilise or improve slightly as banks shift towards lower-cost funding, Kotak Institutional Equities said in a report.

The brokerage expects banks to replace expensive wholesale deposits with more FCNR and retail deposits, which could reduce pressure on margins in the coming quarters. It also expects credit growth to slow from current levels as corporate loan demand returns to more normal levels.

The outlook comes after banks under Kotak's coverage posted a 14 per cent year-on-year rise in earnings in the first quarter of FY27. Net interest income grew 11 per cent, helped by strong loan growth, while provisions fell 32 per cent year-on-year.

Kotak said loan growth for banks under its coverage rose around 200 basis points sequentially to 17 per cent in the quarter. Public and private banks both recorded 17 per cent year-on-year loan growth, while most small finance banks reported growth of 25-30 per cent.

Retail credit growth also picked up to 16 per cent in June 2026. Loans against gold grew around 100 per cent year-on-year, while housing, education and vehicle loans grew 11-19 per cent.

However, the brokerage expects loan growth to slow from current levels. Corporate credit growth rose to 20 per cent during the quarter, but Kotak said part of this increase was driven by one-off factors, including higher borrowing by companies to maintain buffers amid geopolitical tensions, secure inventory and minimise disruptions to ongoing capital expenditure.

Public sector banks performed better than private banks during the quarter, with their margins broadly stable, while most private banks saw sharper pressure on NIMs. Regional banks also reported a strong quarter, supported by healthy loan growth and stable margins.

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Asset quality remained supportive, with gross and net NPL ratios for banks under coverage improving sequentially to 1.7 per cent and 0.4 per cent, respectively. Kotak said retail, SME and corporate asset quality remained broadly stable, while gross slippages remained under control.

The brokerage expects NIM pressure to ease as funding costs decline and the funding mix improves. It retained a positive outlook on asset quality and credit costs in the near term and said it preferred frontline private banks and SBI among public sector banks.