Indian Banks Brace for Weak September Quarter as Loan Growth and Margins Slow

Indian banks are expected to deliver subdued results for the September 2025 quarter, as both loan growth and earnings show signs of moderation. Analysts attribute this slowdown to weaker momentum in the retail and corporate segments, coupled with rising bond yields and the impact of recent repo rate cuts.

Market analysts predict that system-wide loan and deposit growth for the quarter will remain between 9 and 10 percent, indicating a slower demand for credit than in prior quarters.  After a prolonged period of robust growth across banking portfolios, the reduced performance follows the beginning of disbursements being impacted by tightened liquidity and cautious lending.

Treasury Gains Under Pressure as Bond Yields Rise

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The banking sector is also expected to witness a decline in treasury income, mainly due to rising bond yields that have impacted investment valuations. Many lenders had benefited from strong treasury gains earlier in the year, but the recent upward movement in yields has reversed some of these gains.

“Higher yields tend to erode the mark-to-market value of bond portfolios, which could limit treasury income during the quarter,” said a Mumbai-based analyst. The trend is likely to affect both public sector and private banks, though the impact could vary depending on their investment duration and asset mix.

Net Interest Margins May Narrow

The full effect of the repo rate cuts by the Reserve Bank of India (RBI) earlier this year is now being reflected in banks’ net interest margins (NIMs). Analysts believe margins may compress further in the September quarter, as lending rates adjust faster than deposit costs. This could result in a marginal decline in profitability, especially for large banks with a significant share of retail lending.

“While credit demand has remained steady, the recent rate cuts have started squeezing spreads, making it difficult for banks to maintain NIMs at previous levels,” said another banking expert.

Asset Quality Concerns Persist in SME and Vehicle Loans

While overall asset quality remains stable, some concerns persist in small and medium enterprises (SME) and commercial vehicle loan portfolios. Analysts caution that rising costs and slower business activity could lead to stress in these segments. However, banks have increased their provisioning buffers, which may help contain any potential deterioration in asset quality.

Lenders are also expected to remain conservative in new disbursements to higher-risk categories, focusing instead on secured retail and corporate lending.

Outlook: Growth to Remain Subdued in the Near Term

The September quarter is likely to mark a phase of earnings consolidation for the Indian banking sector after several quarters of strong growth. Although fundamentals remain healthy, the combination of lower treasury income, margin pressure, and moderating credit growth is expected to weigh on overall profitability.

Experts believe loan growth may pick up in the second half of FY26, supported by festive demand, government spending, and improved liquidity. However, in the near term, the banking sector is expected to navigate a challenging environment marked by cautious lending and subdued returns.