A bank is a business with a very simple idea and a very complicated execution. It borrows money from depositors at one rate, lends it or invests it at a higher rate, sells services for a fee, and tries to keep its costs and bad loans small enough to leave a profit for shareholders. In 2025-26 Indian scheduled commercial banks (SCBs) made a profit after tax of ₹4,05,268 crore doing this. This part opens up the profit and loss account. It explains net interest income, the net interest margin (NIM), the cost of funds and why the CASA ratio matters so much, then follows the money down to return on assets (ROA) and return on equity (ROE). It uses the RBI's own data for 2023-24 to 2025-26, explains why rate cuts squeeze margins and rate hikes help them at first, and covers the deposit war of 2024–26. How banks create deposits in the first place is in Part 23, how monetary policy reaches loan and deposit rates is in Part 9, and bad loans are covered in Part 25.
In the news
- 17 Oct 2026: HDFC Bank's margin slips as deposits cost more. For July–September 2026, HDFC Bank reported net interest income up 9.7% to ₹346.2 billion, but its NIM fell to 3.16% on total assets (3.32% on interest-earning assets), from 3.38% in January–March 2026. Time deposits grew 22.8% while CASA deposits grew 10.8%, so the CASA ratio fell to 31.6% from 34.1% in March. Treasury gains dropped to ₹7.8 billion from ₹23.9 billion, and profit after tax rose only 4.7%. Why it matters for the exam: this is the CASA squeeze in one bank's numbers, and it shows the difference between NIM on total assets and NIM on interest-earning assets.
- 7 Oct 2026: The RBI's latest bank health numbers. Alongside the repo hike to 5.50%, the Governor's Statement reported a system NIM of 3.22% for June 2026 (3.26% a year earlier), annualised ROA of 1.33% and ROE of 13.26%. Deposits grew 17.31% and credit 18.13% in the year to 15 September 2026. Why it matters for the exam: these are the most recent official figures for NIM, ROA and ROE.
- 1 Oct 2026: Freedom to price bulk deposits takes effect. Directions issued on 30 July 2026 let banks pay different rates on bulk deposits according to their run-off rates under the LCR framework, and require bulk deposit rates to be published on the bank's website by 10:10 am each business day. Why it matters for the exam: banks compete for large deposits through price, and the RBI wants that pricing to be transparent.
- 12 Aug 2026: Draft directions on loan interest rates. The RBI released draft Interest Rates on Loans and Advances Directions, 2026, proposing one principles-based framework for all regulated entities for both fixed and floating rate loans. It noted divergent practices in how banks determine the MCLR and its components. Why it matters for the exam: the way loans are priced decides how quickly NIM moves with the repo rate.
- 7 Aug 2026: SBI's Q1 results show yields falling faster than deposit costs. SBI's domestic yield on advances fell from 8.78% in June 2025 to 8.20% in June 2026, while its domestic cost of deposits fell from 5.21% to 4.85%. Its whole-bank NIM was 2.86%, domestic NIM 3.00%, ROA 1.11% and cost-to-income ratio 46.71%. Why it matters for the exam: in an easing cycle loan yields fall first and deposit costs follow, which is the core of NIM dynamics.
- 30 Jun 2026: Financial Stability Report. SCBs' profit after tax rose to ₹4,05,268 crore in 2025-26 from ₹3,78,163 crore. Net interest income grew only 4.0% (y-o-y, March 2026), but other operating income grew 14.5%. The FSR said NIMs stayed broadly unchanged through 2025-26 because the cost of funds and the yield on assets fell together, and that term deposits kept growing faster than CASA deposits. Why it matters for the exam: fee and other income cushioned profits in a year of slow NII growth.
- 5 Jun 2026: NIM down 20 bp in a year. The Governor's Statement reported a system NIM of 3.26% for March 2026 against 3.46% in March 2025, and said net profit growth of SCBs slowed from 14.67% in 2024-25 to 6.0% in 2025-26, "indicating increasing pressure on profitability". Why it matters for the exam: the 125 bp of rate cuts in 2025 reached loan yields before deposit costs.
- 29 Dec 2025: Trend and Progress of Banking in India 2024-25. The RBI reported that SCBs' NIM fell to 3.1% in 2024-25 from 3.3%, while ROA rose to 1.4% and ROE was 13.5%. The ratio of interest expense to interest income rose to 59.4% from 57.4%. Why it matters for the exam: this annual report is the standard source for bank-group NIM, cost of funds and spread.
How a bank earns money
A bank's income statement has three engines and three drains.
The engines:
- Net interest income (NII). Interest earned on loans, investments and balances with other banks, minus interest paid on deposits and borrowings. This is the core of the business: for all SCBs in 2024-25, NII was ₹9.21 lakh crore out of a net total income of ₹12.96 lakh crore, about 71%.
- Fee and commission income. Charges for services that do not need the bank's own money: loan processing, guarantees and letters of credit, remittances, card and payment fees, government business, and distribution of mutual funds and insurance.
- Treasury and other income. Profit on selling or revaluing government bonds and other investments, foreign exchange and derivatives income, dividends and recoveries from written-off loans. Treasury income rises when bond yields fall (bond prices rise) and can vanish when yields rise.
The RBI's tables put fees and treasury income together as other income (also called non-interest income). In 2024-25 it was ₹3.75 lakh crore, about 29% of net total income.
The drains:
- Operating expenses: salaries and pensions (the wage bill was ₹2.99 lakh crore, about 48% of operating expenses, in 2024-25), rent, technology, and so on.
- Provisions and contingencies: money set aside for bad loans and investment losses (see Part 25).
- Tax. In the RBI's presentation of bank accounts, provisions and contingencies include tax provisions.
The system P&L, 2024-25
The RBI's Report on Trend and Progress of Banking in India 2024-25 gives the combined income and expenditure of SCBs (excluding RRBs):
| Item | ₹ crore | Growth over 2023-24 |
|---|---|---|
| Interest income | 22,68,809 | 12.9% |
| Interest expended | 13,47,782 | 16.9% |
| Net interest income | 9,21,027 | 7.5% |
| Other income | 3,74,885 | 14.7% |
| Operating expenses | 6,29,596 | 6.2% |
| Operating profit | 6,66,316 | 12.8% |
| Provisions and contingencies (incl. tax) | 2,65,137 | 9.9% |
| Net profit | 4,01,180 | 14.8% |
Operating profit is income minus interest expended minus operating expenses: 26,43,694 − 13,47,782 − 6,29,596 = 6,66,316. Net profit is operating profit minus provisions: 6,66,316 − 2,65,137 = 4,01,179, which rounds to the published ₹4,01,180 crore. Interest expended grew faster than interest income (16.9% against 12.9%), so NII grew only 7.5%. That is a margin squeeze in a single line.
Operating profit before provisions is also called pre-provision operating profit (PPOP), or in the FSR, earnings before provisions and tax (EBPT). It shows how much a bank earns before credit losses, so it measures its capacity to absorb bad loans.
Net interest margin
The formula
NIM = Net interest income ÷ average assets
The RBI's Trend and Progress report defines NIM as NII as a percentage of average total assets. Many banks report NIM on average interest-earning assets instead, which gives a higher number because the denominator excludes cash, balances with the RBI and fixed assets, which earn nothing. HDFC Bank's July–September 2026 results show both: 3.16% on total assets and 3.32% on interest-earning assets. Always check which denominator is used before comparing two numbers.
Worked example 1: the system NIM
Total assets of SCBs were ₹2,80,80,520 crore at end-March 2024 and ₹3,12,18,250 crore at end-March 2025.
- Average assets = (2,80,80,520 + 3,12,18,250) ÷ 2 = ₹2,96,49,385 crore
- NIM = 9,21,027 ÷ 2,96,49,385 = 0.0311, or 3.1%
This matches the RBI's published 3.1% for 2024-25 (3.3% in 2023-24).
Spread, cost of funds and yield
NIM is the result of a spread between what the bank earns on its funds and what it pays for them. Table IV.4 of the Trend and Progress report breaks it down (2024-25, per cent):
| Bank group | Cost of deposits | Cost of borrowings | Cost of funds | Return on advances | Return on investments | Return on funds | Spread |
|---|---|---|---|---|---|---|---|
| Public sector banks | 5.0 | 7.3 | 5.2 | 8.5 | 6.8 | 8.0 | 2.8 |
| Private sector banks | 5.1 | 8.2 | 5.5 | 10.0 | 6.8 | 9.2 | 3.7 |
| Foreign banks | 4.0 | 5.1 | 4.2 | 8.5 | 6.7 | 7.4 | 3.2 |
| Small finance banks | 7.1 | 8.1 | 7.2 | 16.2 | 6.8 | 13.9 | 6.7 |
| All SCBs | 5.0 | 7.5 | 5.3 | 9.2 | 6.8 | 8.5 | 3.2 |
The definitions are worth learning, because exam questions test them:
- Cost of deposits = interest paid on deposits ÷ average deposits.
- Cost of funds = total interest expended ÷ average (deposits + borrowings).
- Return on advances (yield on advances) = interest earned on advances ÷ average advances.
- Return on funds = interest on advances and investments ÷ average (advances + investments).
- Spread = return on funds − cost of funds.
In 2024-25 the SCB spread narrowed to 3.2 percentage points from 3.5, because the return on funds fell (8.6% to 8.5%) while the cost of funds rose (5.1% to 5.3%).
Why the groups differ
- Small finance banks have the widest spread (6.7 points) because they lend to small borrowers and microfinance customers at high rates (16.2% return on advances), even though they pay the most for deposits (7.1%). Their business model is covered in Part 33.
- Private banks earn more on advances (10.0%) than PSBs (8.5%) because more of their book is in unsecured personal loans, credit cards and business banking, which carry higher rates.
- Public sector banks have the narrowest spread. They hold more government securities, lend more to large corporates and agriculture at lower rates, and their median NIM is the lowest of the three main groups. The RBI notes that PSB NIMs vary little from bank to bank, while foreign banks' NIMs are the most dispersed. The two groups are compared in Part 22.
What lowers NIM even when the spread is healthy
Some assets earn nothing or little:
- CRR balances (3% of NDTL) earn no interest from the RBI. This "negative carry" is one of the four components of the MCLR (see Part 5).
- SLR securities (18% of NDTL) earn the government bond yield, which is lower than loan yields. In 2024-25 SCBs earned 6.8% on investments against 9.2% on advances.
- Priority sector lending (40% of adjusted net bank credit for most domestic banks) includes loans priced lower than a bank would otherwise choose, and banks that miss targets must place the shortfall in funds such as the RIDF at low rates (see Part 35).
- Non-performing loans earn no interest income once classified as NPAs, because income on them is recognised only when it is actually received.
CASA: the cheapest money a bank has
What CASA is
Deposits come in three kinds:
- Current account (CA) deposits, held by businesses for transactions. Banks pay no interest on them.
- Savings account (SA) deposits, held by individuals. Banks set their own savings rate (it was deregulated in October 2011), typically well below term deposit rates.
- Term deposits (TD) or fixed deposits, which pay a fixed rate for a fixed period.
The CASA ratio is (current + savings deposits) ÷ total deposits. Because CASA money is cheap, a higher CASA ratio means a lower cost of deposits, a lower MCLR and a wider NIM. CASA deposits are also sticky: most savings and current balances are small, spread over millions of accounts and insured up to ₹5 lakh (see Part 30), so they rarely run.
The CASA decline
From the SCB balance sheets in the RBI's Trend and Progress reports (end-March, SCBs excluding RRBs):
| End-March | Current deposits | Savings deposits | Total deposits | CASA ratio |
|---|---|---|---|---|
| 2023 | ₹19.32 lakh crore | ₹59.92 lakh crore | ₹190.68 lakh crore | 41.6% |
| 2024 | ₹21.47 lakh crore | ₹63.41 lakh crore | ₹217.42 lakh crore | 39.0% |
| 2025 | ₹24.15 lakh crore | ₹66.16 lakh crore | ₹241.47 lakh crore | 37.4% |
The ratios are calculated from the published balance sheets: for 2025, (24,14,678 + 66,16,106) ÷ 2,41,47,183 = 37.4%. Note the pattern. Current deposits held their share at about 10% of deposits. The whole decline came from savings deposits, whose share fell from 31.4% to 27.4% in two years. Savings deposits grew only 4.3% in 2024-25, while term deposits grew 14.1%.
The decline continued after March 2025. The December 2025 FSR said the fall in the share of CASA deposits and the rise in the share of time deposits "across bank groups continued", and the June 2026 FSR said term deposits kept growing faster than CASA deposits in 2025-26, "indicating sustained preference for interest-bearing term deposits". In the latest bank results:
- HDFC Bank: CASA ratio 34.1% at end-March 2026, 31.6% at end-September 2026.
- SBI: domestic CASA ratio 39.24% at end-June 2026; CASA deposits grew 9.30% and term deposits 9.86% over the year.
By bank group at end-March 2025 the CASA ratios were close: 37.1% for PSBs, 37.7% for private banks and 40.3% for foreign banks. The mix is very different, though. Savings deposits are 30.4% of PSB deposits but only 25.2% for private banks, which rely more on current accounts (12.5%, against 6.7% for PSBs). Foreign banks are almost entirely current account and term deposit banks: current deposits are 34.6% of their deposits. Small finance banks had a CASA ratio of only 26.1%, which is one reason their cost of deposits is the highest.
Why CASA fell
- High term deposit rates. During the 2022–25 tightening, fresh term deposit rates rose 259 bp against a 250 bp repo increase (see Part 9). Savings rates barely moved, so the gap between a savings account and a fixed deposit widened, and savers shifted money into FDs.
- Credit growing faster than deposits. When loans grow faster than deposits, banks must pay up for funds, usually through term deposits, bulk deposits and certificates of deposit. That raises the term deposit share automatically.
- Other homes for savings. Households can put money into mutual funds, small savings schemes and other instruments instead of savings accounts.
Worked example 2: what a falling CASA ratio does to NIM
Take an illustrative bank with ₹80,000 crore of deposits paying 2.75% on savings deposits and 6.5% on term deposits. Suppose its CASA ratio falls by 5.5 percentage points (from 37.5% to 32%), so ₹4,400 crore moves from savings to term deposits.
- Extra interest cost = 4,400 × (6.50% − 2.75%) = 4,400 × 3.75% = ₹165 crore a year
- If average assets are ₹1,00,000 crore, NIM falls by 165 ÷ 1,00,000 = 0.165 percentage points, or about 16.5 bp.
Each 1-point fall in the CASA ratio costs this bank 800 × 3.75% = ₹30 crore, or 3 bp of NIM. That is why bank managements watch the CASA ratio as closely as they watch NPAs.
The deposit war of 2024–26
For three years Indian banks have competed hard for deposits. The story has three phases.
Phase 1: the credit boom and the funding gap (2023-24). Credit grew much faster than deposits (in 2023-24 loans and advances rose 19.7% against deposit growth of 14.0%, both including the effect of the HDFC merger). Banks raised term deposit rates, issued certificates of deposit and borrowed more, and the cost of funds rose.
Phase 2: slower credit, falling rates, a margin squeeze (2024-25 and 2025-26). Credit growth slowed, the RBI cut the repo rate by 125 bp in 2025 and system NIM fell 20 bp in a year, from 3.46% (March 2025) to 3.26% (March 2026). Deposit growth fell in each half-year from March 2024 to 9.8% in September 2025, "led by sharp deceleration for private sector banks", according to the December 2025 FSR. Banks found it hard to cut deposit rates as fast as loan rates because they still needed the money.
Phase 3: credit surges again (2026). Credit growth jumped to 18.13% in the year to 15 September 2026. Banks again bid for deposits. HDFC Bank grew time deposits 22.8% in a year to September 2026 while its CASA grew 10.8%. The RBI helped from two sides: from June to 30 September 2026 it bore the full hedging cost for banks raising fresh 3–5-year FCNR(B) deposits, and from 1 October 2026 it let banks price bulk deposits more flexibly. Deposit growth rose to 17.31% by 15 September 2026, and the credit-deposit growth gap narrowed to 81 bp.
The lesson for the exam is that the liability side now drives bank profitability. A bank that can grow cheap CASA deposits can lend at competitive rates and keep its margin; a bank that must fund growth with term and bulk deposits pays for it in NIM.
From NIM to ROA and ROE
The cost-to-income ratio
Cost-to-income ratio = operating expenses ÷ (NII + other income)
For all SCBs in 2024-25: 6,29,596 ÷ (9,21,027 + 3,74,885) = 6,29,596 ÷ 12,95,912 = 48.6%. In other words, banks spent about 49 paise on running costs for every rupee of net income. Calculated the same way, PSBs were at 50.1% and private banks at 46.5%. Individual banks vary widely: HDFC Bank reported 39.1% for July–September 2026 and SBI 46.71% for April–June 2026. A lower ratio means a more efficient bank.
Provisions and credit cost
Provisions for bad loans are the most volatile item in the P&L. At the peak of the NPA crisis they wiped out the profits of many PSBs; today, with the GNPA ratio at 1.8% (March 2026), they are much smaller. Banks report credit cost as loan-loss provisions as a percentage of average advances. HDFC Bank's was 0.44% for July–September 2026 and SBI's 0.27% for April–June 2026.
Return on assets
ROA = net profit ÷ average total assets
For 2024-25: 4,01,180 ÷ 2,96,49,385 = 1.35%, which the RBI reports, from supervisory returns, as 1.4%. The ROA can be built up from each line of the P&L as a percentage of average assets:
| Item | ₹ crore | % of average assets |
|---|---|---|
| Net interest income (NIM) | 9,21,027 | +3.11 |
| Other income | 3,74,885 | +1.26 |
| Operating expenses | 6,29,596 | −2.12 |
| Provisions and tax | 2,65,137 | −0.89 |
| Net profit (ROA) | 4,01,180 | 1.35 |
This ROA tree is the most useful way to compare banks. A bank with a low NIM can still earn a good ROA if it has strong fees, low costs or low credit costs, and vice versa.
Return on equity and the DuPont identity
ROE = net profit ÷ average shareholders' equity
The DuPont identity splits it into two parts:
ROE = ROA × equity multiplier, where the equity multiplier = average assets ÷ average equity.
For SCBs in 2024-25, equity (capital plus reserves) averaged (26,17,889 + 30,52,084) ÷ 2 = ₹28,34,987 crore. So:
- Equity multiplier = 2,96,49,385 ÷ 28,34,987 = 10.5
- ROE = 1.35% × 10.5 = 14.2%
The RBI's published ROE for 2024-25 is 13.5%, because it uses supervisory returns and its own measure of equity, but the arithmetic is the same. The identity shows the trade-off at the heart of Basel III. More capital makes a bank safer but lowers the equity multiplier, so for the same ROA it lowers ROE. Banks with CRARs at multi-decade highs (17.7% in March 2026) need a higher ROA to deliver the same ROE.
A worked P&L for an illustrative bank
Here is a full, simplified P&L for an imaginary mid-sized bank, Bank X. All figures are annual averages in ₹ crore and the rates are illustrative, chosen to be close to the system averages.
Balance sheet (averages)
| Assets | ₹ crore | Rate | Liabilities | ₹ crore | Rate |
|---|---|---|---|---|---|
| Cash and balances with RBI | 5,000 | 0% | Current deposits | 8,000 | 0% |
| Investments | 25,000 | 7.0% | Savings deposits | 22,000 | 2.75% |
| Advances | 66,000 | 9.5% | Term deposits | 50,000 | 6.5% |
| Fixed and other assets | 4,000 | 0% | Borrowings | 8,000 | 7.5% |
| Other liabilities | 3,000 | 0% | |||
| Equity | 9,000 | – | |||
| Total | 1,00,000 | Total | 1,00,000 |
Profit and loss
- Interest income = 25,000 × 7.0% + 66,000 × 9.5% = 1,750 + 6,270 = 8,020
- Interest expended = 22,000 × 2.75% + 50,000 × 6.5% + 8,000 × 7.5% = 605 + 3,250 + 600 = 4,455
- NII = 8,020 − 4,455 = 3,565
- Other income (fees 900, treasury 150, recoveries and other 150) = 1,200
- Net total income = 3,565 + 1,200 = 4,765
- Operating expenses (staff 1,150, other 1,150) = 2,300
- Operating profit = 4,765 − 2,300 = 2,465
- Provisions for bad loans = 600
- Profit before tax = 2,465 − 600 = 1,865
- Tax at 25.17% = 469
- Net profit = 1,865 − 469 = 1,396
Ratios
- CASA ratio = (8,000 + 22,000) ÷ 80,000 = 37.5%
- Cost of deposits = (605 + 3,250) ÷ 80,000 = 4.82%
- Cost of funds = 4,455 ÷ (80,000 + 8,000) = 5.06%
- Yield on advances = 9.5%; return on funds = 8,020 ÷ 91,000 = 8.81%; spread = 8.81 − 5.06 = 3.75 points
- NIM on total assets = 3,565 ÷ 1,00,000 = 3.57%; on interest-earning assets (25,000 + 66,000 = 91,000) = 3.92%
- Cost-to-income = 2,300 ÷ 4,765 = 48.3%
- Credit cost = 600 ÷ 66,000 = 0.91%
- ROA = 1,396 ÷ 1,00,000 = 1.40%
- Equity multiplier = 1,00,000 ÷ 9,000 = 11.1; ROE = 1.40% × 11.1 = 15.5% (check: 1,396 ÷ 9,000 = 15.5%)
If Bank X's CASA ratio fell to 32% (Worked example 2), its interest cost would rise by ₹165 crore. After tax at 25.17% that is ₹123 crore less profit, cutting its ROA from 1.40% to about 1.27%.
How rate cycles move NIM
Assets and liabilities reprice at different speeds
When the repo rate changes, each item on the balance sheet resets on its own timetable:
- Repo-linked (EBLR) loans reset at least once every three months, and banks usually move their benchmark within days. They were 68.2% of banks' outstanding floating rate loans at end-June 2026.
- MCLR loans (29.6%) reset on their reset dates, often once a year, and the MCLR itself moves only as the bank's marginal cost of funds changes.
- Fixed-rate loans and bonds keep their rate until maturity.
- Bulk deposits and certificates of deposit are repriced almost at once.
- Term deposits keep their rate until maturity. At end-March 2025, 40.8% of SCB deposits had a residual maturity of up to one year; 25.4% were longer than five years.
- Savings rates are set by banks and change rarely.
On the asset side, a large share reprices quickly. On the liability side, most reprices slowly. This repricing gap decides how a rate change hits NIM.
Rate cuts squeeze margins first
The 2025 easing (125 bp from February to December 2025) is the textbook case:
- System NIM fell from 3.46% in March 2025 to 3.26% in June 2025, as the cuts of February, April and June 2025 (100 bp in all, 75 bp of it after March) passed straight to repo-linked loans.
- It then stayed close to that level (3.26% in September 2025, 3.28% in December 2025, 3.26% in March 2026) as deposit costs caught up. The June 2026 FSR described the cost of funds and the yield on assets as falling "in a largely synchronised manner" through 2025-26.
- At SBI, the domestic yield on advances fell 58 bp between June 2025 and June 2026 (8.78% to 8.20%) while the domestic cost of deposits fell 36 bp (5.21% to 4.85%).
Worked example 3: a 50 bp cut in Bank X
Suppose the repo rate falls by 50 bp, 60% of Bank X's advances are repo-linked, and the bank cuts its savings rate by 25 bp.
- Interest income lost on EBLR loans: 66,000 × 60% × 0.50% = ₹198 crore a year, within three months.
- Interest saved on savings deposits: 22,000 × 0.25% = ₹55 crore.
- Interest saved on term deposits: only the 40% (₹20,000 crore) maturing within a year is renewed at a lower rate, and on average only for half the year: 20,000 × 0.50% × ½ = ₹50 crore.
- First-year fall in NII = 198 − 55 − 50 = ₹93 crore, or about 9 bp of NIM.
In the second year the remaining term deposits reprice and the gap closes. The opposite happens in a hike: loan yields rise first and NIM widens, until deposit costs follow. So the 7 October 2026 hike to 5.50% should, mechanically, help bank margins in the short run. Two things work against that this time: banks are already paying up for deposits to fund 18% credit growth, and PSBs, with only about half their floating loans on the EBLR, reprice their assets more slowly.
Lending mix: retail, corporate and MSME
What a bank lends to decides both its yield and its risk.
At end-March 2025, gross bank credit was ₹182.44 lakh crore, of which personal loans were ₹59.72 lakh crore (about 33%), services ₹50.94 lakh crore, industry ₹39.86 lakh crore and agriculture ₹22.87 lakh crore. Personal loans are the largest single segment, and within them housing loans were 45.6% and other personal loans 37.3% in September 2025 (FSR, December 2025).
| Segment | Typical yield | Risk and cost | Effect on NIM |
|---|---|---|---|
| Retail (home, auto, personal, cards) | Home loans low; unsecured loans and cards high | Many small loans; low concentration risk; higher operating cost per rupee | Unsecured retail raises NIM; home loans lower it |
| Large corporate | Lowest, priced off MCLR or market rates | Few big exposures; concentration risk (see Part 26) | Lowers NIM; borrowers can also tap bonds and CP |
| MSME | Higher than corporate | Higher default risk, more monitoring | Raises NIM; part counts as priority sector |
| Agriculture | Often subsidised (interest subvention) | Highest GNPA ratio (5.1% in March 2026) | Lowers NIM; mandated under PSL |
SBI's domestic book in June 2026 shows a typical large-bank mix: retail personal 41.5%, corporate 33.2%, SME 15.1% and agriculture 10.2%. The GNPA ratios in the same deck explain why mix matters for credit cost: 7.03% in agriculture, 2.93% in SME and 0.83% in corporate. HDFC Bank's growth in the year to September 2026 (retail 11.7%, SME 23.5%, wholesale 16.4%) shows banks turning towards business lending as unsecured retail growth cooled.
Fee income: what banks charge for
Fee income uses little capital and does not depend on the interest rate cycle, so banks value it highly. SBI's fee income of ₹9,476 crore for April–June 2026 breaks down as:
| Source | ₹ crore |
|---|---|
| Loan processing charges | 2,114 |
| Remittance, collection, etc. | 1,768 |
| Commission on government business | 1,578 |
| CVE income | 1,140 |
| Commission on LC/BG (letters of credit and bank guarantees) | 888 |
| Miscellaneous fee income | 1,988 |
| Total | 9,476 |
SBI's total non-interest income was ₹15,923 crore; the rest came from treasury profits (₹4,319 crore), forex and derivatives (₹497 crore) and miscellaneous income (₹1,631 crore). HDFC Bank's other income of ₹138.3 billion for July–September 2026 was ₹96.9 billion of fees and commissions, ₹15.5 billion of forex and derivatives revenue, ₹7.8 billion of treasury gains and ₹18.1 billion of miscellaneous income including recoveries and dividends.
Other important fee sources are third-party distribution (insurance and mutual funds, which banks sell as corporate agents or distributors), cards and payments (interchange fees on credit and debit cards and merchant acquiring), processing fees on loans and charges on services such as cheques and minimum-balance accounts. Treasury income is the least reliable part of other income: HDFC Bank's fell from ₹23.9 billion to ₹7.8 billion in a year as bond yields rose.
Common exam traps
- NIM is not the spread. The spread is return on funds minus cost of funds (3.2 points for SCBs in 2024-25). NIM is NII ÷ average assets (3.1%).
- NIM on total assets is lower than NIM on interest-earning assets. HDFC Bank: 3.16% against 3.32%.
- CASA is current plus savings deposits. Term deposits are not part of it, and current accounts pay no interest.
- The cost-to-income ratio uses net income (NII plus other income), not gross interest income.
- Operating profit is before provisions. Net profit is after provisions and tax.
- ROE = ROA × equity multiplier. More capital lowers the multiplier, so it lowers ROE for a given ROA.
- A rate cut usually lowers NIM at first, because loans (especially EBLR loans) reprice faster than deposits. A hike usually raises it at first.
- The 2024–25 CASA fall came from savings deposits. Current deposits held their share at about 10%.
Key facts at a glance
| NIM formula (RBI) | NII ÷ average total assets |
| SCB NIM (annual accounts) | 3.3% in 2023-24; 3.1% in 2024-25 |
| SCB NIM (supervisory, annualised) | 3.46% Mar 2025; 3.26% Mar 2026; 3.22% Jun 2026 |
| Cost of funds and return on funds, 2024-25 | 5.3% and 8.5%; spread 3.2 points |
| Interest expense ÷ interest income | 59.4% in 2024-25 (57.4% in 2023-24) |
| CASA ratio, SCBs | 41.6% (Mar 2023), 39.0% (Mar 2024), 37.4% (Mar 2025) |
| Cost-to-income, SCBs 2024-25 | 48.6% (PSBs 50.1%, private 46.5%) |
| ROA and ROE | 1.4% and 13.5% in 2024-25; 1.33% and 13.26% (annualised) in June 2026 |
| SCB net profit | ₹4,01,180 crore in 2024-25 (T&P); ₹4,05,268 crore in 2025-26 (FSR) |
| Other income share | About 29% of net total income in 2024-25 |
| Deposit and credit growth | 17.31% and 18.13% (y-o-y, 15 September 2026) |
| Floating loans by benchmark | EBLR 68.2%, MCLR 29.6% (end-June 2026) |
| Bulk deposit pricing | LCR-linked rates; daily disclosure by 10:10 am, from 1 October 2026 |
Exam corner: what to remember
- A bank's income = NII + other income (fees, treasury, forex, recoveries). Costs = operating expenses + provisions + tax.
- NIM = NII ÷ average assets; SCB NIM was 3.1% in 2024-25, down from 3.3%.
- Spread = return on funds − cost of funds = 8.5 − 5.3 = 3.2 points (2024-25). SFBs have the widest spread (6.7), PSBs the narrowest (2.8).
- CASA ratio fell from 41.6% to 37.4% between March 2023 and March 2025; the fall was in savings deposits.
- Cost-to-income = opex ÷ (NII + other income); about 48.6% for SCBs in 2024-25.
- ROA = net profit ÷ average assets (1.4% in 2024-25); ROE = ROA × assets ÷ equity (13.5%).
- Rate cut → NIM squeezed first; rate hike → NIM widens first. System NIM fell 20 bp from March 2025 to March 2026 after 125 bp of cuts.
- Latest: HDFC Bank CASA 31.6% and NIM 3.16% (September 2026); SBI domestic NIM 3.00% and CASA 39.24% (June 2026).
For syllabus details, see our pages for RBI Grade B, SBI PO and IBPS PO.
Test yourself
In the RBI's Report on Trend and Progress of Banking in India, net interest margin is defined as
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Answer: (b) NIM is NII as a percentage of average total assets; (d) is the spread.
Which of the following is NOT part of a bank's CASA deposits?
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Answer: (c) A fixed deposit is a term deposit; CASA covers current and savings accounts only.
A bank has NII of ₹4,000 crore, other income of ₹1,000 crore and operating expenses of ₹2,250 crore. Its cost-to-income ratio is
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Answer: (b) 2,250 ÷ (4,000 + 1,000) = 45%.
A bank's ROA is 1.2% and its average assets are 12 times its average equity. Its ROE is
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Answer: (d) ROE = ROA × equity multiplier = 1.2% × 12 = 14.4%.
According to the RBI's Trend and Progress report released on 29 December 2025, the NIM of scheduled commercial banks in 2024-25 was
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Answer: (b) It fell to 3.1% from 3.3% in 2023-24; 2.6% was the PSB figure and 3.6% the private bank figure.
Which bank group had the widest spread between return on funds and cost of funds in 2024-25?
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Answer: (d) SFBs had a spread of 6.7 points, because their return on advances (16.2%) is far higher than their cost of funds (7.2%).
Immediately after a cut in the repo rate, a bank whose loans are mostly repo-linked and whose deposits are mostly fixed-rate term deposits will usually see
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Answer: (b) EBLR loans reprice within three months, but term deposits reprice only at maturity, so yields fall before costs.
HDFC Bank's results for the quarter ended 30 September 2026 showed a CASA ratio of
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Answer: (a) It fell from 34.1% in March 2026 as time deposits grew 22.8% against 10.8% for CASA deposits.
Under the RBI's directions effective 1 October 2026, banks may offer differential interest rates on bulk deposits based on
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Answer: (b) Differential pricing is linked to LCR run-off rates, and bulk deposit rates must be published by 10:10 am each business day.
A bank with ₹50,000 crore of average assets sees ₹2,000 crore move from savings deposits paying 3% to term deposits paying 7%. By how much does its NIM fall?
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Answer: (c) Extra cost = 2,000 × 4% = ₹80 crore; 80 ÷ 50,000 = 0.16%, or 16 bp.
Further reading
- RBI, Report on Trend and Progress of Banking in India 2024-25: Chapter IV has the consolidated balance sheet, income statement, cost of funds and spread tables for every bank group; the best single source for this topic.
- RBI, Financial Stability Report, June 2026: Chapter II tracks deposits, credit, NIM, NII and profitability every half-year.
- RBI, Financial Stability Report, December 2025, Chapter II: explains the 20 bp fall in NIM in the first half of 2025-26 and the continued shift from CASA to term deposits.
- RBI, Monetary Policy Report, October 2026: lending and deposit rate transmission, benchmark shares and credit growth that drive NIM.
- HDFC Bank, results for the quarter ended 30 September 2026: a clear example of how a bank reports NIM, CASA, fee income and cost-to-income.
- SBI, analyst presentations: quarterly yield, cost of deposits, NIM, fee break-up and loan mix for India's largest bank.
- RBI, Commercial Banks – Interest Rate on Deposits Second Amendment Directions, 2026: the short official text on bulk deposit pricing and disclosure.
Sources
- RBI, Trend and Progress of Banking in India 2024-25, Chapter IV: Table IV.1 (balance sheet, deposits by type), Table IV.2 (maturity profile), Table IV.3 (income, expenditure, NII, NIM 3.1% and 3.3%), Table IV.4 (cost of funds, return on funds, spread), interest expense ratio 59.4%, RoA 1.4% and RoE 13.5%, bank-group NIM dispersion (accessed 24 October 2026)
- RBI, Trend and Progress 2024-25, Appendix Table IV.1: net profit, RoA, RoE, sectoral deployment of credit at end-March 2025 (accessed 24 October 2026)
- RBI, Trend and Progress 2023-24, Chapter IV and Appendix Table IV.1: deposits by type at end-March 2023 and 2024, NIM for 2022-23 and 2023-24, deposit and credit growth in 2023-24 (accessed 24 October 2026)
- RBI press release, Report on Trend and Progress of Banking in India 2024-25, 29 December 2025: release date, RoA and RoE for 2024-25 and H1 2025-26 (accessed 24 October 2026)
- RBI, Financial Stability Report June 2026, Chapter II: PAT of ₹4,05,268 crore, NII growth 4.0%, other income growth 14.5%, NIM broadly unchanged, term deposits outpacing CASA, deposit growth 11.5%, credit growth 14.5%, agriculture GNPA 5.1% (accessed 24 October 2026)
- RBI, Financial Stability Report December 2025, Chapter II: NIM down 20 bp in September 2025, NII growth 2.3%, deposit growth 9.8%, CASA share falling, housing 45.6% of personal loans (accessed 24 October 2026)
- RBI Governor's Statements: 5 December 2025, 8 April 2026, 5 June 2026, 5 August 2026 and 7 October 2026: quarterly SCB NIM, RoA and RoE from supervisory returns, net profit growth of 14.67% and 6.0%, deposit and credit growth, FCNR(B) hedging-cost facility (accessed 24 October 2026)
- RBI, Monetary Policy Report, October 2026: credit growth of 18.1% on 15 September 2026, H1 changes in WALR and WADTDR (accessed 24 October 2026)
- RBI press release, Amendment Directions on Interest Rate on Deposits, 30 July 2026 and Commercial Banks Second Amendment Directions: effective 1 October 2026, LCR-linked bulk deposit pricing, daily disclosure (accessed 24 October 2026)
- RBI press release, Draft Interest Rates on Loans and Advances Directions, 12 August 2026: harmonised framework, MCLR divergences (accessed 24 October 2026)
- HDFC Bank, press release for the quarter ended 30 September 2026: NII, NIM 3.16% and 3.32%, other income components, cost-to-income 39.1%, credit cost 0.44%, CASA 31.6%, deposit and loan growth (accessed 24 October 2026)
- HDFC Bank, press release for the quarter ended 31 March 2026: NIM 3.38%, CASA 34.1% (accessed 24 October 2026)
- SBI, Analyst Presentation Q1 FY27, 7 August 2026: NIM, yield on advances, cost of deposits, CASA 39.24%, fee and non-interest income break-up, cost-to-income, ROA, loan mix and segment GNPA (accessed 24 October 2026)