According to Fitch Ratings, India’s banking sector is on a promising trajectory, poised for growth bolstered by enhanced asset quality, robust capital reserves, and a stable profitability outlook. As banks maneuver through the financial landscape, analysts suggest that credit metrics will largely hold steady into fiscal year 2026, although earnings could be impacted by cyclical pressures on margins and credit costs.
Currently, the sector is experiencing its slowest loan growth in four years, hovering at just 10.6%. Lending to non-bank financial institutions (NBFIs) and unsecured retail customers has particularly softened, a shift attributed to stricter regulatory oversight and challenging funding conditions. However, optimism remains. Fitch projects a rebound in loan growth to between 12% and 13% in FY2026, fueled by an accommodating monetary policy and gradually easing funding constraints.
Despite this optimistic outlook, banks must enhance their deposit mobilization to sustain the nearly 120 basis points improvement in loan-to-deposit (LDR) ratios they have achieved. A notable decrease in the impaired loans ratio, falling by 60 basis points to 2.2% in FY2025, indicates a positive shift. Bad loans saw a decline of 12%, further painting a brighter picture for the sector as a whole.
Fitch emphasizes that the impaired-loan ratios and credit costs for most banks have likely hit their lowest point. There remains potential for gains as some banks might improve their standings through write-offs of legacy bad loans, which would further shrink the outstanding bad loan stock. In Fitch’s eyes, the Indian banking sector’s strong performance is not merely a flash in the pan; expectations are set for sustained progress, contingent on banks maintaining solid core financial metrics that enhance their resilience against economic fluctuations.
What does Fitch Ratings predict for India’s banking sector in FY2026?
Fitch Ratings forecasts a rebound in loan growth to 12% to 13% in FY2026, supported by an accommodative monetary policy and improved funding conditions, while projecting that credit metrics will remain stable.
Why is the current loan growth considered the slowest in four years?
The current loan growth rate of 10.6% is primarily due to tighter regulatory scrutiny and tougher funding conditions impacting lending, particularly to NBFIs and unsecured retail customers.
What improvements have been observed regarding banks’ impaired loans?
The impaired loans ratio has fallen by 60 basis points to 2.2% in FY2025, accompanied by a 12% reduction in bad loans, indicating a trend towards better asset quality in the banking sector.
