Federal Bank goes slow on home loans to protect margins amid stiff competition

Federal Bank is dialing back its focus on housing loans due to intense market competition and unattractive yields, managing director and CEO KVS Manian said, adding that the bank will instead prioritize lending in higher-yielding segments to drive more profitable growth.

“Home loans is a highly competitive segment and at the current pricing, we do not see risk-adjusted returns being favourable. Therefore, we have consciously taken a call to go slower on home loans,” Manian said in the bank’s Q4 earnings call.

The bank is currently offering loans only to “multi-product customers” of the bank, he said, adding that it is actively moving away from customers who seek a home loan as their sole relationship with the bank.

“We want to grow it in a profitable manner, and therefore it was a conscious call to slow it (home loans) down,” Manian said. The bank will focus instead on higher-yielding segments such as credit cards, gold loans, commercial vehicle loans, and commercial banking, he added.

The private sector posted a net profit of ₹1,259 crore, up 21% sequentially and 22% annually. Net interest income for the quarter was ₹3,173 crore, up 20% sequentially and 33% annually. The bank recorded a one-time gain from an IT refund worth ₹456 crore but used the proceeds to make a floating provision of the same amount for its transition to the expected credit loss (ECL) framework.

Manian was also optimistic on corporate loans, saying that their multi-product nature offers prime opportunities to cross-sell services and capture a larger share of a client’s total business. He expects the segment to grow around 10% in FY27. Total customer assets or advances of the bank grew 10% on year and 3% on quarter to ₹2.7 trillion as of 31 March, 2026.

Yield focus

The strategy is driven by a need to support yield on advances in a low-policy-rate environment, and to protect margins. The RBI cut the policy repo rate by a cumulative 125 bps between February and December 2025 to 5.25%. For comparison, rates on home loans from some public-sector banks start at 7.10-7.15%.

“We think the current yields are not suitable for pushing a single-product strategy. At another time, where our risk-return matrices are favourable, we will of course do what it takes,” Manian said. About 60% of the lender’s loan book is floating and linked to the repo rate, he added. Yield on advances for the quarter was 8.65% lower than both 8.74% in the previous quarter and 9.31% in the year ago period.

“At this point it is probably reasonable to assume that we are at the bottom of the rate cycle and from here rates either go up or remain flat for some time. That should give us an opportunity to expand yields on the asset side,” he said, adding that margins are expected to improve 5-6 basis points sequentially from here.

Federal Bank’s net interest margin for the quarter was 3.74%. Excluding the one-time gain, it was 3.20%.

On the liability side, Federal Bank expects the improving cost of funds will help support margins. This is driven by a growing proportion of low-cost current account and saving account (CASA) and retail term deposits, and a falling share of pricier wholesale deposits. Cost of funds for the quarter was 5.46%. Total deposits of the bank were up 5.4% on quarter and 11% on year at ₹3.1 trillion at the end of March. CASA deposits grew 8.3% sequentially to ₹1.0 trillion, accounting for 32.9% of total deposits.