KOCHI: While most banks are breaking their heads over how to weather the looming rate cuts that threaten to dent lending yields, CSB Bank is sitting relatively cool – thanks to its large pile of fixed-rate loans that offer a natural cushion.
Banks are required to reduce their lending rates with each cut in repo by RBI if their loans are based on floating rates linked to external benchmarks like repo or treasury bills, which in turn dent their net interest margin (NIM).
But this doesn’t happen with fixed rates loans, which most banks had pruned in order to switch to floating rate loans linked to benchmarks like repo, and in very rare cases, to treasury bills.
Only 15–16 per cent of CSB bank’s loan book is linked to external benchmarks like the repo rate and treasury bills (T-Bill) yields – far lower than industry averages.
In contrast, about 60 per cent of CSB Bank loans are on fixed rates, including gold loans and credit cards, which remain immune to rate cuts.
The rest – about 23 per cent – is linked to MCLR, which adjusts with a lag. This positioning gives CSB a distinct advantage as the industry braces for a rate-cutting cycle by the Reserve Bank of India (RBI).
In contrast, a large number of banks – both national and regional – have a sizable portion of their books linked to external benchmarks, particularly the RBI’s repo rate or treasury bill yields.
These loans are essentially re-priced immediately when policy rates are adjusted, making net interest margins (NIMs) vulnerable to compression in a falling rate environment, which has been the case during 2025.
“The good part is, when interest rates start falling, on a competitive basis, we’ll be better off because our fixed rate loans are slightly higher,” said Pralay Mondal, MD & CEO of CSB Bank.
Peer banks
Federal Bank, also headquartered in Kerala, has over 39 per cent of its loans tied to external benchmarks, while South Indian Bank has around 30–35 per cent exposure.
Bigger banks like SBI and HDFC Bank have between 50 to 75 per cent of their retail loans linked to external benchmarks, making them significantly exposed to margin pressure when rates fall.
The bank’s management, in its recent post-earnings call, said its relatively high cost of funds – currently over 6 per cent due to a weak current account- savings account (CASA) base – is expected to gradually decline in tandem with the broader fall in government securities (G-Sec) yields.
The temporary spike in hedging costs last quarter, which had pushed up borrowing costs, is also behind it.
“The good part is, when interest rates start falling, on a competitive basis, we’ll be better off because our fixed-rate loans are slightly higher,” the management said, noting that the fixed portfolio, especially gold loans, maintains yield stability across cycles.
The bank expects to retain yields around 11.5–12 per cent.
For FY24, CSB Bank reported a net interest margin (NIM) of 4.13 per cent. The quarterly NIM stood at 3.75 per cent.
The bank has guided for FY25 NIM to hover around 4 per cent – suggesting relative margin stability at a time when others may face compression.
In a sector where falling rates often spell thinner spreads, CSB Bank’s conservative loan mix might just be the trick keeping it afloat – while others splash to stay above water.
