The Indian banking sector is poised for a turnaround in net interest margins (NIMs) after hitting a low point in the second quarter, according to industry analysts. The benefits of the recent rate cut cycle are expected to manifest from the third quarter onwards, potentially boosting the profitability of banks across the country.

Rate Cut Transmission and Its Impact

Banks have been proactive in passing on the benefits of rate cuts to borrowers:

• A full 100 basis points rate cut has been extended to homebuyers and small businesses
• Approximately 30 basis points reduction has been applied to other loan categories
• Banks are beginning to reap the advantages of lower deposit costs

Q2 NIM Decline

The sector witnessed a significant drop in NIMs during the second quarter:

• Overall sector NIM fell by 25 basis points year-on-year, reaching 2.89%
• This marks a decline from 3.15% recorded in the same quarter of the previous year

Factors Contributing to NIM Pressure

Several factors have contributed to the squeeze on NIMs:

1. Subdued credit growth
2. Declining Current Account Savings Account (CASA) deposits
3. Faster repricing of loans compared to deposits

Bank-wise NIM Performance

Private Sector Banks

Public Sector Banks

Outlook for H1 FY2024

Analysts anticipate that NIMs will continue to face pressure through the first half of the fiscal year. This ongoing strain is primarily attributed to the continued repricing of loans in response to the changing interest rate environment.

Future Prospects

Despite the current challenges, the outlook for the Indian banking sector appears optimistic. The full impact of the rate cut cycle is expected to materialize in the coming quarters, potentially leading to a recovery in NIMs. This anticipated improvement could contribute to enhanced profitability for banks, benefiting both the institutions and their stakeholders.

As the sector navigates through this transitional period, investors and industry observers will be keenly watching for signs of the projected NIM recovery and its implications for the overall financial landscape in India.

Indian banks are poised to face a notable shift in their dividend policies as profitability comes under pressure from slowing loan growth and compressed margins. According to recent projections by S&P Global Market Intelligence, the banking sector is expected to witness its first decline in dividend payments in four years for the fiscal year ending March 2026.

Dividend Outlook

The forecast suggests that total dividends from 12 large Indian banks will decrease by 4.2% to $5.98 billion, down from $6.24 billion in the previous year. This reduction reflects the challenging economic environment and regulatory pressures facing the banking sector.

Key highlights of the dividend projections include:

Factors Influencing the Dividend Cut

Several factors contribute to the anticipated reduction in dividend payments:

1. Interest Rate Environment: The Reserve Bank of India's 100 basis point repo rate cut has led to compressed bank margins. While loan rates have declined, deposit funding costs remain elevated due to competition in the banking sector.

2. Slowing Credit Growth: Banking credit growth has decelerated to 10% year-on-year, down from 13.6% previously. This slowdown is attributed to weak demand and cautious economic conditions.

3. Trade Uncertainties: The imposition of 50% tariffs on Indian goods by the United States has further dampened market expectations and economic outlook.

Investor Relations Activities

Despite the challenging outlook, banks continue to engage with investors. For instance, HDFC Bank has scheduled participation in the JP Morgan Emerging and Frontier Markets Opportunities Conference in London on September 18, 2025. This engagement suggests that banks are actively communicating with institutional investors to address concerns and present their strategies in the face of current challenges.

Market Implications

The projected dividend cuts reflect the banking sector's need to conserve capital and maintain financial stability in a challenging economic environment. Investors and analysts will likely closely monitor how banks navigate these headwinds and adapt their strategies to maintain profitability and shareholder returns in the coming fiscal year.

As the situation evolves, stakeholders will be watching for any policy measures or economic developments that could impact the banking sector's performance and dividend policies in the near to medium term.