New Delhi [India], May 15 (ANI): Indian banks continue to remain financially stable despite pressure on profit margins after recent interest rate cuts, with bad loans still largely under control, according to a banking sector report by Systematix Institutional Equities.

The report said banks are beginning to feel the impact of lower lending rates following the Reserve Bank of India's repo rate cut in December 2025, which has reduced the interest income earned by banks on loans. However, the overall health of the banking system remains steady.

Referring to fresh loans turning into bad loans or non-performing assets (NPAs), the report noted, 'The slippages in the quarter were broadly in control.'

According to the report, most banks reported stable asset quality in the January-March quarter of FY26, even as some banks saw a decline in their net interest margins (NIMs) -- a key measure of a bank's profitability from lending operations.

NIM refers to the difference between the interest a bank earns on loans and the interest it pays to depositors.

Explaining the pressure on margins, the report said banks earned relatively lower interest income from loans during the quarter after the RBI's rate cut started reflecting fully in lending rates.

'The Yield on Advances (YoA) [Interest earned on loans] as expected was sequentially lower as the quarter had the full impact of the 25bps repo rate reduction,' the report said.

The report noted that some banks, such as State Bank of India (SBI), Axis Bank and Indian Bank, saw sharper pressure on margins during the quarter.

At the same time, the report said deposit growth remained healthy, indicating that customers continue to keep money in banks while credit demand also remains strong.

'Growth in net advances for our coverage universe seen in 3Q has sustained in 4Q,' the report said, adding that aggregate loan growth remained strong on both quarterly and annual basis.

The report also highlighted that deposit growth outpaced loan growth sequentially during the quarter due to year-end seasonal trends.

Systematix said banks are now focusing more on increasing low-cost deposits such as savings and current accounts, commonly referred to as CASA deposits, to protect profitability in a falling interest rate environment.

The brokerage, however, cautioned that risks from the ongoing West Asia conflict could emerge later in FY27.

'There is no incipient rise in asset quality yet, but the banks expect the true impact of the West Asia war to be visible in Q2FY27 or in H2FY27,' the report said.

The report explained that prolonged geopolitical tensions could impact businesses and borrowers if higher oil prices and global uncertainty persist.

Banks are also preparing for the implementation of the new Expected Credit Loss (ECL) framework, under which lenders may have to set aside money in advance for possible future loan defaults.

'Though the banks are still assessing the full impact, they sounded confident on managing the transition,' the report said.

Despite near-term pressure on margins, Systematix said it remains positive on the banking sector overall. (ANI)