PNB Looks to Cheaper Deposits to Defend Margins After Rate Cuts Bite
Punjab National Bank is actively preparing for further deposit rate reductions. The state-owned lender faces intensifying pressure on its margins. Earlier policy rate cuts have already pushed lending yields lower. Now, cheaper deposits appear as the best strategy to protect profitability.
PNB managing director and chief executive Ashok Chandra confirmed the bank's direction. He stated that PNB cut deposit rates by about 20 basis points across tenures effective 1 January 2026. The bank sees clear scope to implement more cuts in the near future.
Margin Squeeze Drives Urgency
The urgency stems from a visible squeeze on the bank's margins. PNB's domestic net interest margin fell to 2.65% in the third quarter of fiscal year 2026. This figure is 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. They fell to 7.8% in Q3 from 8.01% in the previous quarter and 8.5% a year ago.
Chandra explained the situation to Mint. He noted that deposit rate cuts had been limited so far due to a dynamic market environment. The bank also needed to balance depositor interests. However, he acknowledged that margin strain is now pushing the case for faster repricing.
Impact of RBI Rate Cuts
A series of rate cuts by the Reserve Bank of India since February 2025 has added significant pressure. The total reduction amounts to 125 basis points, including 25 bps in December 2025.
Both public and private sector banks have cut deposit rates to varying degrees. Their actions depend on growth momentum and the composition of their loan and deposit portfolios.
Latest RBI data showed weighted average rates on domestic term deposits fell to 6.8% in November 2025 from 7.2% in February 2025. In response to the RBI moves, PNB has trimmed its deposit rates by about 80 basis points so far.
Management Expectations and Brokerage Views
Despite the near-term pressure, PNB's management expects margins to stabilize. Chandra stated during the bank's Q3 earnings call that for Q4, they expect the NIM to remain at around the same levels as Q3. This expectation holds despite the full impact of the December rate cut in Q4.
He added that the full-year FY26 domestic NIM is expected to remain above FY25's 2.7%. A key source of optimism is the bank's special 440-day term deposit scheme launched last year. Through this scheme, PNB raised over ₹2.8 trillion at rates of 7.25% and 7.75%.
Chandra detailed the repricing timeline. He said 70% repricing happened up to 31 December, with 21% going to be repriced in the March quarter and the remaining 9% in the first quarter of FY27. He expects the positive impact of 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. The firm said PNB's Q3 NIM, down 8 bps sequentially, came in below estimates. It declined more sharply than peers, weighing on net interest income.
Elara expects the full-year FY26 NIM at 2.4%. PNB had initially guided for a NIM of 2.9-3% for FY26. This guidance was revised downward in the December quarter to 2.8-2.9%.
The brokerage noted that the bank had earlier guided that the 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.
Financial Performance and Deposit Growth
PNB's net interest income for the quarter fell 4.5% from a year earlier. It 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.
Domestic deposits increased 8.3% to ₹16 trillion as of end-December 2025. Low-cost current account and savings account deposits grew 5.3% year-on-year to ₹5.9 trillion in Q3. 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. PNB has opened more than 30,000 accounts under new individual and institutional savings and current account schemes.
The bank's asset-liability committee will assess the impact of the latest rate cut at the end of the month. After this assessment, it will take a view on future deposit rate cuts. Chandra emphasized that if the repo rate remains the same, the bank can definitely look for further reductions.
