Large banks, foreign lenders likely to benefit from FCNR-B, ECB inflows; NIMs to stay range-bound: Report

The report noted that incremental spreads for private sector banks (PVBs) improved month-on-month in July 2026, as fresh weighted average term deposit rates (WATDDR) declined by 25 basis points (bps), compared with a 27-bps increase in June. However, WATDDR remained unchanged for public sector banks (PSBs), after rising 7 bps in June.

A weighted average term deposit rate is the blended interest rate a lender pays across all its fixed or term deposits, which is adjusted proportionally by the size of each deposit.

Apart from this, weighted average lending rate (WALR) on fresh rupee loans declined by 3 bps for PVBs and 5 bps for PSBs in July. WALR is the average interest rate charged by banks for loans, which is adjusted according to the size or volume of each loan.

Consequently, Caotial 360 One noted, "...the incremental spreads for PVBs increased by 22 bps MoM (versus 27 bps MoM decline in June 2026), whereas it declined by 5 bps MoM for PSBs (versus an increase of 3 bps in June 2026)."

For PSBs, incremental spreads narrowed by 5 bps, following a 3-bps expansion in June. PSBs' incremental spreads are also running below their outstanding spreads. At the same time, fresh rupee term deposit rates declined by 5 bps for PVBs but increased by 22 bps for PSBs, over the last three months.

WALR on fresh loans declined by 10 bps for PVBs, while rising 11 bps for PSBs. Incremental spreads for scheduled commercial banks (SCBs) declined by 9 bps, while outstanding spreads declined by 7 bps for PVBs and increased by 4 bps for PSBs.

Meanwhile, Government of India (G-sec) bond yields for the five-year and 10-year maturities rose by around 14 bps and 11 bps, respectively, over the past month. Among individual banks, foreign banks (FBs) raised their peak two-year term deposit (TD) rate by 5 bps to 6.65 per cent.

On this backdrop, Capital 360 One highlighted, that the "gap between the non-food credit growth and deposit growth has narrowed to ~330 bps versus 5 bps a year ago."

It further stated that while some banks have raised term deposit rates across select buckets over the past three months, inflows through Foreign Currency Non-Resident (FCNR-B) deposits and External Commercial Borrowings (ECBs) are likely to support incremental funding at reasonable costs in the near term.

"We believe large PVBs/PSBs as well as foreign banks are likely to be the key beneficiaries than mid-tier/regional banks given the strong franchise and wide distribution network," it said, adding "healthy FCNR (B) deposit mobilisation should ease pressure on domestic deposit growth, aid overall system liquidity and LCR ratio for banks."

For net interest margins (NIMs), Capital 360 One expects them to remain range-bound going forward, while asset quality and credit costs for private and public sector banks are likely to remain benign. (ANI)