Bank profitability set to rise as external benchmark loans reprice

Banks with a higher proportion of external benchmark lending rate (EBLR) loans are expected to see improved net interest margins in the near term as lending rates adjust more quickly than deposit costs following recent monetary policy moves. When the Reserve Bank of India raises its benchmark rates, banks linked to external benchmarks typically reprice their loan portfolios faster than they raise deposit rates, creating a temporary margin expansion window.

This dynamic is particularly advantageous for lenders who have shifted a significant portion of their loan books to EBLR products, moving away from the older base rate system. The faster transmission of rate changes to borrowers, combined with the stickiness of deposit pricing, allows banks to widen their spreads during the repricing cycle.

Credit growth momentum is expected to remain resilient, supported by robust festive season consumer demand and sustained corporate investment appetite. Banks are positioned to capitalize on both higher lending volumes and improved margins as borrowers across retail and wholesale segments continue to tap credit facilities.

The confluence of faster loan repricing and steady credit demand suggests Indian lenders could see sequential margin improvement over the coming quarters. However, this advantage is typically cyclical, lasting until deposit repricing catches up with lending rate adjustments across the banking system.