Indian banks widened their lending margins in April as deposit costs fell while fresh loan rates edged higher, reflecting stronger borrower demand and a shift towards bank financing as alternative funding sources became more expensive, according to a report by CareEdge Ratings.
The spread between fresh weighted average lending rates and weighted average domestic term deposit rates for scheduled commercial banks (SCBs) rose sharply by 40 basis points month-on-month to 2.73 per cent in April, CareEdge said in its report released on June 9.
Fresh lending rates increased 10 basis points from the previous month to 8.50 per cent, while fresh deposit rates declined 30 basis points to 5.77 per cent.
The divergence points to contrasting trends in lending and deposits, with borrowers increasingly turning to banks as capital market funding and external commercial borrowings (ECBs) become more expensive amid higher bond yields and currency depreciation, the report said.
"The combination of higher lending rates and lower deposit costs led to a sharp widening in fresh spreads on a sequential basis, protecting margins," CareEdge said.
The report noted that the 10-year weighted average government security yield rose 22 basis points month-on-month and 54 basis points year-on-year to 6.95 per cent in April, making market-based borrowing less attractive.
Fresh spreads widened across both public and private sector banks, although the increase was more pronounced among private lenders. Fresh spreads for private sector banks rose 36 basis points month-on-month, compared with a 30-basis-point increase for public sector banks.
The widening in fresh spreads came despite continued transmission of lower interest rates across the banking system on an annual basis. Compared with a year earlier, fresh spreads were down 19 basis points.
India's banking sector also continued to record robust credit growth.
Outstanding bank credit rose 16.2 per cent year-on-year to Rs 211.9 lakh crore as of May 15, 2026, significantly higher than the 9.8 per cent growth recorded in the corresponding period a year earlier.
According to CareEdge, growth was supported by healthy retail demand, particularly for gold and vehicle loans, alongside steady lending to micro, small and medium enterprises for business expansion and working capital needs. Lending to non-banking financial companies and selected corporate borrowers also contributed to growth.
Deposits grew at a slower pace than credit but remained strong. Outstanding deposits increased 12.2 per cent year-on-year to Rs 256.9 lakh crore as of May 15, driven largely by term deposits, which accounted for nearly 88 per cent of total deposits.
Meanwhile, outstanding lending and deposit rates continued to moderate.
The spread between outstanding lending and deposit rates widened marginally by 2 basis points month-on-month to 2.39 per cent in April as funding costs declined faster than lending yields. Outstanding lending rates fell 1 basis point sequentially to 8.98 per cent, while deposit rates eased 3 basis points to 6.59 per cent.
CareEdge said the banking system remained in surplus liquidity, averaging Rs 2.6 lakh crore at the end of April, aided by government spending and government bond redemptions. However, geopolitical tensions in West Asia could indirectly tighten liquidity through higher crude oil prices, currency volatility and foreign exchange interventions by the Reserve Bank of India.
Looking ahead, the rating agency said the trajectory of bank spreads would depend on funding conditions, liquidity trends and the relative attractiveness of market borrowings. Any easing in capital market yields could encourage large corporates and non-bank lenders to return to market funding, potentially moderating bank lending rates.
The report also noted that the one-year median marginal cost of funds-based lending rate (MCLR) declined 30 basis points year-on-year to 8.65 per cent in May, reflecting the gradual transmission of cumulative policy rate cuts and improved liquidity conditions. |
