Despite moderation in loan growth and rising credit stress, stable asset buffers and easing retail lending norms could support banks through FY2026.
New Delhi, March 30: The Indian banking sector is likely to maintain a steady loan growth rate of 12–14% in FY2026, driven by easing liquidity conditions and expected moderation in risk weights on unsecured retail loans, according to a new report by Ambit Capital.
“With easing liquidity and probable easing of risk weights on unsecured retail, we expect sector loan growth to stay at 12-14% in FY26E,” the report stated.
Loan growth had slowed to 12% in February 2025, marking the eighth consecutive month of moderation, compared to 16.6% in the same period last year, according to Reserve Bank of India (RBI) data.
Margins Under Pressure, But Some Banks Better Placed
Despite solid loan growth projections, net interest margins (NIMs) could remain under pressure due to high deposit pricing and softening yields, with a potential decline of 5–20 basis points (bps) across lenders.
Banks with a higher share of fixed-rate loans are likely to fare better on margins, compared to those heavily exposed to variable-rate portfolios.
Retail NPAs and Credit Costs May Rise
Post-COVID, banks witnessed an impressive trend in asset quality. However, the recent surge in unsecured personal loans and credit card debt has triggered a spike in retail non-performing assets (NPAs).
Ambit anticipates that recent consolidation in retail lending will help banks identify and manage balance sheet stress by the first half of FY26. As a result, credit costs may rise, but banks are well-equipped with:
- Provision Coverage Ratio (PCR) of around 70%
- Buffer provisions ranging from 0.7% to 1.7% of total loans
These buffers are expected to offer a cushion against emerging risks.
Deposit Mobilization a Growing Concern
The report flags deposit mobilisation as a growing challenge, citing high competition and shifting saver preferences. Fixed deposits have been losing favour, especially in urban areas where savers now prefer higher-yield investment avenues.
Even in rural and semi-urban regions, tech-driven capital market platforms are attracting retail money, making it difficult for traditional banks to grow their deposit base effectively.
“Despite size, reach, or digital sophistication, deposit augmentation has become a concern for all lenders,” the report noted.
As India’s financial ecosystem grows more competitive and diverse, banks will have to balance loan growth, asset quality, and deposit traction to maintain long-term resilience.