PNB prepares for more deposit rate cuts as margin pressure builds
Margin pressure from falling loan yields is pushing the state-owned lender to consider deeper deposit repricing after a series of policy rate cuts.
MUMBAI: Punjab National Bank, or PNB, is preparing the ground for further deposit rate cuts as pressure on margins intensifies, betting that cheaper deposits are now the best way to protect profitability as earlier policy rate cuts have already pushed lending yields lower.
The state-owned lender cut deposit rates by about 20 basis points (bps) across tenures effective 1 January 2026 and sees scope to go further, managing director and chief executive Ashok Chandra said. The reductions are expected to begin lowering PNB’s cost of deposits from the March quarter, at a time when loan yields have fallen much faster than funding costs.
“As of now also, hardly 80 bps rate cut has happened in any segment in our deposit. So there is still enough room. We will see how this situation pans out," Chandra told Mint, adding that the bank's asset-liability committee will assess the impact of the latest rate cut at the end of the month and then take a view on future deposit rate cuts. “(If the repo rate remains the same) we can definitely look for that," he said.
Margin squeeze drives urgency
The urgency comes from a visible squeeze on margins. PNB’s domestic net interest margin (NIM) fell to 2.65% in Q3FY26, down from 2.72% in the previous quarter and 3.09% a year earlier. While the domestic cost of deposits eased only marginally to 5.1% from 5.18% in the September quarter, yields on advances dropped more sharply to 7.8% in Q3 from 8.01% in the previous quarter and 8.5% a year ago.
Chandra said deposit rate cuts had been limited so far because of a “dynamic" market environment and the need to balance depositor interests, but acknowledged that margin strain is now pushing the case for faster repricing.
A series of rate cuts by the Reserve Bank of India (RBI) since February 2025, totalling 125 bps, including 25 bps in December 2025, has added pressure. Both public and private sector banks have cut deposit rates to varying degrees, depending on growth momentum and the composition of their loan and deposit portfolios. Weighted average rates on domestic term deposits fell to 6.8% in November 2025 from 7.2% in February 2025, latest RBI data showed.
In response to the RBI rate cuts, PNB has trimmed deposit rates by about 80 bps so far.
Despite the near-term pressure, management expects margins to stabilize. “For Q4, we expect our NIM to remain at around the same levels as that of Q3 despite the full impact of December rate cut in Q4," Chandra had said during the bank’s Q3 earnings call on 19 January, adding that full-year FY26 domestic NIM is expected to remain above FY25's 2.7%.
A key source of optimism, he said, is the bank’s special 440-day term deposit scheme launched last year, through which PNB raised over ₹2.8 trillion at rates of 7.25% and 7.75%. “That 70% repricing has happened up to 31 December, and 21% is going to be repriced in the March quarter and remaining 9% in the first quarter of FY27," Chandra said, adding that he expects the positive impact of the 60–70 basis points of deposit repricing on margins to begin showing from the first quarter of the next financial year.
However, brokerage firm Elara Capital flagged continued pressure in a post-earnings note, saying PNB’s Q3 NIM, down 8 bps sequentially, came in below estimates and declined more sharply than peers, weighing on net interest income (NII).
Elara expects full-year FY26 NIM at 2.4%. PNB had guided for a NIM of 2.9-3% for FY26, which was revised downward in the December quarter to 2.8-2.9%.
“The bank had earlier guided that cost of deposits would reduce sharply, while yields would remain stable. However, deposit costs did not decline materially and yields moderated, resulting in compression of NIMs," the brokerage said.
PNB’s NII for the quarter fell 4.5% from a year earlier and rose a marginal 0.6% sequentially to ₹10,533 crore. The bank posted a net profit of ₹5,100 crore for the reporting quarter, up 13.1% on year, while domestic deposits increased 8.3% to ₹16 trillion as of end-December 2025.
Low-cost current account and savings account (Casa) deposits grew 5.3% year-on-year to ₹5.9 trillion in Q3, while term deposits rose 10.4% to ₹10.7 trillion. As a result, the Casa ratio declined to 37.1% from 37.3% in the previous quarter and 38.1% a year earlier.
Chandra said the bank revamped its Casa portfolio in April 2025 and is seeing “good traction," having opened more than 30,000 accounts under new individual and institutional savings and current account schemes.
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