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Indian banks’ profitability likely to moderate further in FY26: Ind-Ra
Jan-08-2025

India Ratings and Research (Ind-Ra) in its latest report has said that Indian banks’ profitability is expected to moderate further in FY26 with an expectation of rising slippages and higher credit costs over the FY24 levels which was at decadal lows. It said a bulk of the asset quality stress will emanate from the unsecured retail exposure. It stressed that the same is ‘manageable’ and will not have any systemic ramifications.

The agency said the under Rs 50,000 retail unsecured portion accounts for around 0.4 per cent of the banking credit, while only 3.6 per cent of the advances are the ones having a lending rate of over 11 per cent. It said that credit growth has lost steam, and sharply revised down its FY25 system credit growth estimate to 13-13.5 per cent as against 15 per cent earlier, and also added that the core interest income is likely to be hit in the next fiscal.

According to the report, banks' net interest margin (NIM) will narrow by 0.10 per cent in the new fiscal due to a transmission of past hikes, higher slippages and a change in accounting policies. The gap between credit and deposit growth, which has moderated lately, is likely to narrow in FY26, the agency believes. It noted that other challenges for the sector include the introduction of new norms on project finance which may require higher provisioning, liquidity coverage ratio under which lower proportion of liabilities may be available for lending and a transition to expected credit loss framework.

The agency has maintained its rating and outlook on banks, non-bank finance companies and housing finance companies, but tweaked the outlooks on certain asset segments due to the heightened stress possibilities. On microfinance, it said the issues are cyclical in nature and pegged the assets under management (AUM) growth to come at 5 per cent in FY25 and improve to 12 per cent in FY26. 


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