A Balanced Approach: How Fee Income Supports Banks Amid Margin Strains

While India's banking sector grapples with the perennial problem of margin squeeze, Bank of India CEO Rajneesh Karnatak opines that lenders with strong fee and non-interest income sources would beat their peers. With the Reserve Bank of India's recent rate reductions exerting downward pressure on net interest margins (NIMs), banks are looking for newer means to maintain profitability.

 

Margin Pressure to Continue

Karnatak points out that since lending rates are rapidly repriced down while deposit rates trail, banks will keep experiencing NIMs being compressed till at least the end of 2025. Bank of India's NIM fell to 2.82% internationally and 3.10% domestically in FY25, and compression is likely to continue for the next few quarters.

 

Fee Income as a Buffer

Strong non-interest income banks-including fees, commissions, and treasury gains-are more likely to counter declining margins. Bank of India saw a 96% quarter-on-quarter increase in non-interest income in Q4 FY25 at ₹3,428 crore, that supported net profit growth by 82.5% during the quarter.

 

Strategic CASA Growth:

To offset increasing cost of funds, the bank is concentrating on increasing its low-cost CASA deposits, placing high-net-worth customers in focus, and spreading special services.

 

Asset Quality & Growth:

Asset quality remains good, with gross NPAs reducing to 3.27%. FY26 credit growth is expected at 12–13%, driven by robust corporate loan demand.

 

Karnatak says that though margin squeeze will persist, banks with well-diversified income streams and high asset quality will be the winner in the changing scene.

 

Sources: Economic Times, Business Standard, CNBC-TV18