KOCHI: Are banks quietly pulling back from corporate loans to shield their net interest margins (NIMs), already under pressure, even as the Reserve Bank of India (RBI) is said to be preparing more rate cuts – threatening a deeper squeeze on bank profitability?
Retail inflation has cooled sharply in recent months, touching a near four-year low of 3.2 per cent in April 2025, giving the central bank greater headroom and reasons to ease rates. With three repo rate cuts already delivered this year, taking the policy rate down to 5.5 per cent, more reductions are expected, especially as the RBI has officially shifted its stance to “accommodative.”
While rate cuts support broader economic growth, they are proving painful for banks, squeezing the spread between lending and deposit rates – the core of NIMs. Analysts warn that each 50 bps cut in repo rates could shave off 15–20 bps from private sector bank margins. State-run banks may see 10–12 bps of erosion, due to their slower repricing dynamics.
NIM squeeze
The squeeze is already evident. ICICI Bank, HDFC Bank, Axis Bank, and Union Bank have all flagged NIM pressures in recent quarters. South Indian Bank (SIB), too, has acknowledged the challenge, stating that its corporate lending is now heavily skewed towards short-term credit – allowing quicker exit and redeployment into MSME, home loans, and other high-yield retail segments.
“Given where the rate cycle is headed, we are cautious with long-term corporate exposure,” the CEO & MD of SIB, PR Seshadri, said while interacting with analyst recently. “We want flexibility to move capital to better-yielding books as the pressure on margins increases,” he added.
A recent S&P Global report estimates that system-wide NIMs could fall by 18 bps in FY25, and further by 9 bps in FY26, driven largely by faster transmission on the lending side and sticky deposit rates.
Corporate lending is measured
Interestingly, while banks appear to be moving towards corporate lending short term to boost volumes and stabilise yields, the broader strategy is more nuanced. Several lenders—including ICICI, SBI, Bank of Baroda(BoB), and Union Bank – have slowed the pace of long-tenor corporate loan growth, recognising that these loans often deliver poor risk-adjusted returns.
Instead, banks are tactically balancing their books. Corporate loans are being deployed selectively, often in short-term, working capital, or supply chain finance formats. Longer-term capital deployment is clearly shifting towards MSMEs, retail, and secured segments like home, gold and auto loans, where spreads remain attractive even in a falling rate environment.
SBI’s recent Rs25,000 crore equity raise is being seen partly as a move to reinforce capital buffers for this retail-heavy expansion, as the bank treads cautiously in the large corporate space.
Corporates setting sights on debt
At the same time, large Indian corporates are showing growing preference for market-based financing. A record Rs10 trillion has already been raised via corporate bonds in 2025, with marquee names like Adani Ports, HUDCO, and Embassy REIT opting to tap debt markets instead of bank loans.
In May alone, short-term bond issuances topped Rs61,000 crore – nearly three times the year-ago period – signaling a clear migration towards quicker, lower-cost capital.
Equity markets are also playing a role. Several companies have revived IPO and QIP plans to strengthen their balance sheets at attractive valuations, reducing the need for bank borrowing.
“More and more corporates are bypassing us to tap bonds or the equity route,” noted a senior executive at a large private sector bank. “This has altered credit demand structurally.”
The road ahead
As the rate-cut cycle deepens, the margin regime for banks is bound to get tougher. Most lenders are already tweaking strategies – boosting fee income streams, accelerating retail expansion, and pruning low-yield exposures.
The shift in corporate lending is less about growth and more about granularity and risk calibration. In this new environment, banks that act with precision and discipline – allocating capital to high-margin segments and maintaining flexibility – will be best positioned to weather the squeeze. Corporates with good credit rating may now focus on alternative routes rather than relying entirely on banks for their funding needs.
The NIM era, as we know it, is shifting. And banks are racing to stay ahead of the curve.
