Indian Banks Expected to Maintain Stable Net Interest Margins in Q3 FY26
According to a report released on Monday by Systematix Institutional Equities, Indian banks are projected to report stable net interest margins in the third quarter of FY26. However, overall profitability is expected to show improvement year-on-year.
The report highlights that the increase in profitability can be attributed to sustained sequential growth in advances, higher fee income, and reduced credit costs.
Factors Driving Profitability
The report forecasts that the momentum in advances will continue to grow due to lower interest rates, benefits from GST rate reductions, and increased tax limits. This sustained growth is expected to contribute to the overall profitability of Indian banks.
Additionally, the report predicts that net interest margins may experience a slight dip in Q4 but are anticipated to improve thereafter. This improvement is expected as the cost of deposits is set to decrease with the reprising of existing books and normalization of unsecured segment slippages, leading to lower credit costs.
Impact of Interest Rates and CRR Reduction
Despite the ongoing decline in the yield on advances, the positive effects of prior term deposit rate reductions are expected to be noticeable starting this quarter. Furthermore, advantages from Cash Reserve Ratio (CRR) reductions are likely to help maintain steady margins for Indian banks.
Current State of Banking System Advances
As of December 12, 2025, banking system advances witnessed a 4.5% quarter-on-quarter and 11.7% year-on-year expansion, as per RBI data. The report suggests that fee income is poised to increase with the improvement in advances growth, while trading gains may decline due to improvements in benchmark 10-year ‘G-Sec yields’.
Asset Quality and Recovery Trends
While most banks are expected to maintain steady asset quality, a surge in seasonal agricultural slippages may occur. The report mentions that Q3 is likely to witness steady recovery trends, which will help mitigate the impact of credit costs.
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