Indian Banks Poised for Steady Loan Growth in FY26
As we look ahead to the financial year 2025-26 (FY26), Indian banks are anticipated to experience a loan growth of 12-14%. This optimistic forecast stems from a surge in deposit inflows, as outlined in a recent report from Ambit Capital Research. The banking industry is gradually recovering from previous liquidity challenges, allowing for improved loan-to-deposit ratios (LDRs).
Factors Driving Loan Growth
The enhancement in LDRs is primarily attributed to:
- An increase in deposit inflows
- A measured pace in loan disbursements
Experts predict that this upward trend will be reflected in the year-end LDR. Furthermore, the easing of liquidity conditions alongside a potential reduction in risk weights for unsecured retail loans is expected to bolster consistent loan growth.
According to the report, "With easing liquidity and probable easing of risk weights on unsecured retail, we expect sector loan growth to stay at 12-14% in FY26E."
Challenges in Net Interest Margins
Despite these positive indicators, the banking sector may encounter obstacles regarding net interest margins (NIMs) in FY26. The primary challenges include:
- High costs associated with deposits
- Decreasing yields on loans
These elements could result in a decline of 5-20 basis points in NIMs for many lenders. However, the impact will differ based on each bank’s portfolio mix and the structure of their liabilities. Institutions with a higher proportion of fixed-rate loans are likely to navigate this challenge more effectively than those with a greater share of variable-rate loans.
Rising Non-Performing Assets
The report also highlights a notable increase in non-performing assets (NPAs) within the retail sector, primarily due to a rise in unsecured loans such as personal loans and credit cards. While banks had previously maintained robust asset quality in the aftermath of COVID-19, the growing number of unsecured loans has led to a spike in retail defaults.
To mitigate these risks, banks are beginning to consolidate their retail lending portfolios. This strategy aims to help them identify and manage potential stress on their balance sheets by the first half of FY26.
Preparedness Against Defaults
Although credit costs are set to rise in FY26, banks have fortified their provisions, ranging from 0.7-1.7% of total loans. With a provision coverage ratio (PCR) hovering around 70%, banks are better equipped to handle possible defaults, offering a buffer against financial distress.
Conclusion: A Cautiously Optimistic Outlook
With improving liquidity conditions and potential regulatory support, such as a lowering of risk weights on unsecured retail loans, the Indian banking sector is on track for steady growth in FY26. Nevertheless, financial institutions will need to adeptly manage deposit costs, pressures on margins, and challenges related to asset quality to ensure stability in the upcoming fiscal year.
For more insights on the banking sector and its trends, check out our detailed analysis here.
